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Rupee to remain weak for 2-3 months - Calyon Bank
June, 05th 2008

The Indian rupee may remain under pressure in the coming two to three months on account of high commodity prices, a stronger dollar, and price pressures, Calyon Bank said in a research note on Wednesday.

"The dollar-rupee may reach 44.0 in September 2008," Sebastien Barbe, senior economist (Asia) at Calyon Bank, wrote in the note.

"India's specific balance of payments vulnerability remains in place. While most regional economies in the region enjoy trade and current account surpluses, India is running deficits on both acconts," he wrote.

Large export of services and huge private remittances help to cap the current account deficit, but the trade deficit is certainly widening and high oil prices should keep it large in coming months, Barbe said.

Inflows into the local stock market, a key support for the rupee, have been declining this year. Foreigners have been net sellers of more than $4 billion so far in 2008, with the stock index down more than 23 percent.

"Even after its recent correction, the stock market index remains fairly high, and could correct downward further, which would be consistent with further capital outflows," the note said.

The vulnerability of the rupee is also fuelled by the political uncertainty and high inflation, which is expected to rise further, after the increase in retail fuel prices.

"We expect Europe's GDP growth to decelerate significantly in Q2 and Q3 compared with Q1. India sends 22 percent of its exports to the European Union, and the European deceleration will likely drive export growth down, possibly adding to forex pressure," the note said. (Reporting by Swati Bhat; Editing by Harish Nambiar)

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