Rupee slips on rate cut expectations

The Indian rupee was unable on Friday to mount a recovery from its sharpest one-day fall in more than 12 years.

The Indian rupee was unable on Friday to mount a recovery from its sharpest one-day fall in more than 12 years as it was weighed down by expectations of rate cuts and the stock market losing some of its early momentum.

A sharp fall in annual inflation to 8.98 per cent in early November, its lowest since early May and well below market forecasts, has raised expectations of further cuts in interest rates, which could weaken support for the rupee.

At 10:36 a.m., the partially convertible rupee was at 49.45/46 per dollar, more than a quarter of a per cent down from Wednesday’s close of 49.30/32 per dollar, when it fell 2.4 per cent, its biggest daily fall since Feb. 1996.

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The currency market was shut on Thursday for a holiday.

“With inflation under control and timely data suggesting a sharp decline in economic activity — exports, indirect tax collections and auto sales all declined in October — we continue to expect substantial policy easing in the coming months,” Sonal Varma, an economist at Nomura Research said in a note.

Nomura expects the central bank to cut its key short term lending and borrowing rate by 150 and 100 basis points each by mid-2009 to shore up flagging growth.

Stocks rose as much as 3 per cent in early trade but had turned negative within the first hour despite strong gains elsewhere in Asia.

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Foreign fund selling of shares has also been a key factor in the rupee’s weakness this year. They have so far sold a net $12.7 billion worth of shares after buying a record $17.4 billion last year.

The rupee hit a record low of 50.29 per dollar in late October. After gaining more than 12 per cent against the dollar in 2007, it has fallen more than 20 per cent this year.

One-month offshore non-deliverable forwards were quoting at 49.81/49.96 per dollar, weaker than the onshore rate.