Rupee hits 13 month low

The Indian rupee fell to a 13-month low as public sector oil companies continued to buy dollars to pay for crude oil, which surged to a new all-time high above US$127 per barrel. Also, data showing inflation touching a new three and a half year high heightened worries about slowing economic growth amid record oil prices and slowing foreign capital inflows.

The rupee lost 2.2% during the week to close at 42.5075 a dollar, adding to last week's 2.3% fall. It earlier dropped to 42.92, the lowest intraday level since April 12, 2007. But, it recovered some ground on speculation that the Government will ease curbs on overseas borrowings, allowing more capital inflows. At its low of the day, the rupee was down 8.2% in 2008. It had risen more than 12% against the dollar in 2007. The currency's near 8% decline this year is the third-worst performance among the 10 most-traded Asian currencies after the South Korean won and the Thai baht.

Government data showed annual inflation at 7.83% for the week ended May 3, while provisional inflation rate for the week ended March 8 was revised up to 7.78% from 5.92%. Earlier this week, data showed that the annual pace of growth in industrial production more than halved to 3% in March from 8.6% in the previous month. The gain was the smallest since February 2002.

Crude oil, India's biggest import, hit record highs near US$127 a barrel this week, raising the risk of the trade deficit widening. Moreover, FIIs have sold Indian equities worth US$2.9bn this year, a sharp turnaround from record net purchases of US$17.4bn last year.

On a trailing 12-month basis, the current account deficit - excluding remittances and trade deficit - remain high at around 4.5% and 7.2% of GDP, respectively, says Morgan Stanley. Higher oil prices will likely add further to the trade deficit, the US brokerage adds. The rupee may fall by 5-7% against the US dollar by the end of 2008, dragged down by a slew of factors such as a widening trade deficit, and soaring oil and commodity prices, Morgan Stanley said in a note.