JPMorgan Chase & Co. lowered its forecasts for the Indian rupee, predicting the currency will decline this year as rising crude oil prices double the nation’s current-account deficit.
The rupee, the second-worst performer this year among the 10 most-active currencies in Asia excluding the yen, will weaken almost 5 percent to 45 against the dollar by the end of the year, versus an earlier forecast of 40, the third-largest U.S. bank said in a research note dated yesterday. Slowing capital flows and exporters holding back foreign exchange earned abroad will fuel the currency’s decline, according to JPMorgan.
``Deteriorating balance of payments dynamics led us to reassess our view,’’ wrote JPMorgan’s strategists Siddharth Mathur and Vikas Agarwal. ``We were optimistic of a reversal in the rupee later in the year, driven by a revival of global risk appetite and return of stability to the credit markets. We no longer anticipate rupee strength in the second half of 2008.’’
The rupee fell 0.5 percent to 42.9575 today in Mumbai, according to data compiled by Bloomberg. It may slide to 44 by the end of June, compared with a previous estimate of 42, Singapore- based Mathur and Mumbai-based Agarwal said, confirming the contents of the report.
Goldman Sachs Group Inc. lowered its forecasts on May 23, saying the rupee will drop to 44.10 a dollar in six months, compared with its earlier prediction of 40.30.
The advance in crude oil will almost double the nation’s import bill to $100 billion in the financial year ending March 2009, from $55 billion last year, according to JPMorgan. That will more than double the shortfall in India’s current account, a broad measure of trade and investment flows.
Oil Doubles
India depends on imports to meet three-quarters of its annual energy needs. Oil futures on the New York Mercantile Exchange touched an all-time high of $135.09 a barrel last week after doubling in the past 12 months.
The local currency may also fall as money managers abroad reduce their holdings of the nation’s assets, JPMorgan said. The benchmark Bombay Stock Exchange Sensitive Index, or Sensex, has slumped almost 20 percent this year following a 47 percent rally in 2007, Bloomberg data show.
``The outlook for Indian equities remains uncertain as country-specific headwinds are increasing,’’ Mathur and Agarwal said. ``Slowing earnings growth and still weak appetite for risky assets suggests continued weak equity flow for now.’’
Global funds have sold $3 billion more of local stocks than they bought this year through May 26, according to the Securities & Exchange Board of India. They bought a net $17.2 billion of stocks in 2007, a record, helping the rupee complete its best year in at least 34 years.
``The path of local equities remains the most important indicator to watch,’’ the analysts said. ``A return of net flows of $1.5 billion to $2 billion every month might be necessary to reinforce the waning rupee-bullish sentiment.’’
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