India rupee weakens to two-year low as stocks drop on yuan slump

[MUMBAI] India's rupee slid to its weakest level in almost two years and stocks fell for a fourth day as China's devaluation of the yuan roiled Asian markets.

The rupee decreased 0.9 per cent to 64.7950 a dollar at the close in Mumbai, after sliding to the weakest level since September 2013. The 30-stock S&P BSE Sensex dropped 1.3 per cent to a two-week low of 27,512.26. Sovereign bonds held steady.

The Sensex is still the biggest advancer among the four largest emerging markets over the past two months, fueling optimism that India is more insulated from a slowdown in China. The rupee has slid less than other developing Asian currencies in the past month. A weaker yuan benefits India, a net importer of Chinese goods, according to Royal Bank of Canada.

"The rupee is relatively less impacted in Asia as India is less export dependent," said Sue Trinh, head of Asia foreign exchange strategy at RBC in Hong Kong.

"A weaker yuan is arguably beneficial for India."

Global investors have bought a net US$210 million of Indian shares this month, the only inflows among eight Asian markets tracked by Bloomberg. They plowed in US$882.4 million in July. Local investors added 58.4 billion rupees (US$901 million) to equity mutual funds in July, extending 15 straight months of net purchases, data from the Association of Mutual Funds in India show.

The 53 per cent plunge in Brent oil prices has helped cool India's retail inflation, improve public finances and allowed the central bank to lower interest rates three times this year. Consumer-price gains slowed to 3.78 per cent in July, the lowest reading since November, data released after the close of trading Wednesday showed. The increase was below the median estimate of a 4.4 per cent advance.

In addition to the these factors, falling borrowing costs make for a "great cocktail for a bull market," Ramesh Damani, an investor and a member of the Bombay Stock Exchange Ltd, said in a Bloomberg TV India interview. "Liquidity is the mother's milk of a bull market, and that's intact."

The yuan devaluation won't affect India much as its economy isn't as dependent on exports as China's, Mr Damani said. India runs a US$42 billion trade deficit with China, data compiled by Bloomberg show.

A gauge of Asian currencies headed for its biggest two-day slide since 1998 on Wednesday. The yuan tumbled for a second day after the People's Bank of China stuck to its plan to give market forces more sway in determining the exchange rate.

Standard Chartered and Barclays Plc say the Reserve Bank of India won't weaken the rupee aggressively even as a move by Vietnam to widen the dong's trading band boosted speculation faltering exports may spark a currency war.

The Sensex has risen 6 per cent in the past year as global funds bought US$11.5 billion of local shares amid steps by Prime Minister Narendra Modi to bolster the economy.

"There will be punctuations marks - Greece, the Fed and China - but India's bull market will continue," Mr Damani said, adding he's bullish on drugmakers, software, consumer goods and media companies, and property developers.

Vedanta Ltd, the nation's biggest copper produce, plunged 7.9 per cent to its lowest level since April 2009, and Hindalco Industries Ltd., an aluminum producer, tumbled 7.1 per cent to a two-year low.

Coal India Ltd fell for a sixth day before its quarterly results, the longest run of losses since the period ended Sept 17, 2014. State Bank of India Ltd lost 4.6 per cent, extending this year's decline to 18 per cent. Tata Motors Ltd, owner of Jaguar Land Rover, slid 3.8 per cent.

The 50-stock CNX Nifty index lost 1.3 per cent to 8,349.45. The India VIX Index soared 9.8 per cent, the most since May 12, to 17.44 at the close in Mumbai.

The yield on sovereign notes due May 2025 was little changed from Tuesday at 7.80 per cent.

BLOOMBERG