Rupee hit by tax dispute and rising oil

The Indian rupee, a rare standout performer this year among emerging market currencies, fell to its lowest level for 20 months against the US dollar as a tax dispute and rising oil prices hit traders' support for New Delhi's economic strategy.

Traders have warmed to the rupee, crowding the market for long positions as Prime Minister Narendra Modi's administration stepped up plans to meld fiscal discipline with economic expansion.

In the first quarter, the rupee held its own against the all-conquering dollar. But since then, it has lost ground and on Thursday hit Rs64.28 to the greenback, a level last touched in September 2013.

The euro has also gained 8.5 per cent on the rupee in the past two weeks.

Analysts blamed a number of domestic factors for the sudden rupee downturn, notably a brewing row between India's government and foreign fund managers over unexpected tax demands.

Last month, the government suggested it would seek to raise as much as $6bn in historical revenue charges from global investors, alarming fund managers and prompting an outflow of capital over recent days.

Shubhada Rao, Mumbai-based economist at Yes Bank, also cited the recent rally in global oil prices as a further factor denting confidence in India's heavily energy-import dependent economy.

"Oil prices have moved up, which will then knock on to inflation here, in addition to the tax issue, which appears to have resulted in a big net outflow of funds this week," she said.

Roger Hallam, chief investment officer for global currencies at JPMorgan Asset Management, said the rupee had been a favoured consensus long in the currency markets.

"But the Reserve Bank of India has been cutting rates in recent months, reducing the carry available from being long rupee," he said.

Mr Hallam added that progress on economic reform had slowed and rising oil prices would lead to a deterioration in India's current account position.

There was also evidence, he said, of foreign portfolio inflows stalling at high levels. "In any case the RBI has taken advantage of foreign inflows as an opportunity to build reserves," he said.

HSBC strategist Himanshu Malik said in a note the RBI's foreign currency reserves had grown by more than $25bn since the start of 2015, indicating a desire by the central bank to check the rupee's appreciation.

But such intervention "would have to be supplemented by monetary stimulus to peg real exchange rates lower", said Mr Malik.

The rupee fell as low as Rs68 against the US dollar during the period of capital flight to hit many emerging markets in late 2013.

Few analysts expect the currency to weaken to such an extent again, but many think continued oil price rises and further outflows could increase downward pressure, potentially hitting Rs65 in the near-term.

"Over the last two to three days, our peer currencies across Asia have fallen, but the rupee has weakened more because these domestic factors are stronger," Ms Rao added. "So in the short run, further weakening cannot be ruled out."

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation