By Anil Varma Dec. 5 (Bloomberg) -- India’s rupee is poised to recover from a 21 percent decline this year as the outlook for economic growth overpowers concern over last week’s terrorist attacks in Mumbai, said Aberdeen Asset Management Ltd. and F&C Management Ltd. The currency has rebounded 1.8 percent from a record low as the three-day rampage by 10 gunmen that left 195 people dead failed to trigger sales of the nation’s assets. The International Monetary Fund predicts India will expand 6.3 percent next year, the fastest pace after China among the world’s 20 biggest economies. “If you look around the world, which economy can offer growth rates of at least 5 to 6 percent?” said Jeffrey Chowdhry, who manages $2 billion as head of emerging-market equities in London at F&C, a unit of U.K. insurer Friends Provident Plc. “You can count them with fingers on one hand and India is one of them. We were ready to take advantage of any panic, but there wasn’t any.” The rupee advanced for a fourth day to 49.725 per dollar as of 11:21 a.m. in Mumbai, according to data compiled by Bloomberg. It touched a record low of 50.615 on Dec. 2, after the assault that began Nov. 26 on two luxury hotel complexes and the city’s main railway station. Indian 10-year bonds yields dropped to the lowest since April 2005 on speculation the central bank will cut its overnight lending rate. India’s benchmark Bombay Stock Exchange Sensitive Index fell 1 percent today to 9139.15, following a 5.5 percent rally yesterday. ICICI Bank Ltd., India’s second largest, was upgraded to “outperform” from “underperform” by Macquarie Research yesterday, which said rate cuts will spur loan demand. Rupee Forwards The rupee may climb to 48 by June 30, according to the median forecast by 22 analysts in a Bloomberg survey. Traders have scaled back bets for how far the currency will weaken over the next month. Non-deliverable forward contracts show an implied rate of 50.03 rupees to the dollar, versus a record low of 52.26 on Oct. 27. Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars. Sales of Indian equities by overseas investors this year exceeded purchases by a record $13.8 billion as the collapse of Lehman Brothers Holdings Inc. in September forced funds to hoard dollars and dump emerging-market assets. India’s benchmark stock index has dropped 54.5 percent this year. Cooling Tensions The rupee’s 21 percent drop in 2008 is the most since 1991 and compares with a 37 percent slide in South Korea’s won and 29 percent loss for the Brazilian real. Diplomacy to cool tension between India and Pakistan may avert further rupee losses, said Edwin Gutierrez, who manages about $5.5 billion of emerging-market bonds in London at Aberdeen, Scotland’s largest independent money manager. “The terror attacks will really have an impact on the rupee only if there’s a big deterioration in India-Pakistan relations,” said Gutierrez. “Thus far, diplomacy seems to be winning the day fortunately.” Secretary of State Condoleezza Rice visited New Delhi and Islamabad this week, urging Pakistan to cooperate with India’s probe of the attacks. Pakistan Role India blamed “elements” in Pakistan for the attacks, while Pakistan denied its government was involved. Indian Foreign Minister Pranab Mukherjee dispelled concern that fighting may break out between the two nuclear-armed neighbors, saying “no one is talking about military action.” The rupee faces the risk of greater volatility as the attacks may curb foreign investment and tourism, said Vikas Agarwal, a currency strategist at JPMorgan Chase & Co. in Mumbai. Travel companies reported as much as 30 percent of bookings by foreign tourists were canceled following the attacks, the Economic Times reported Dec. 2. “The attacks have added an element of uncertainty to the rupee’s outlook,” said Agarwal. “One needs to see if there’s any impact on capital flows, particularly foreign direct investment and tourism receipts.” The currency may strengthen to 47.5 by June 30, he said. Implied volatility on one-month dollar-rupee options was at 21.5 percent, almost twice the average of 11 percent this year and down from 33 percent on Oct. 27. Traders quote the expected swings in the currency as part of pricing options. Global Crisis Efforts by governments around the world to ease the financial crisis may lead the rupee to recoup losses, said Han Sia Yeo, a currency strategist in Singapore at Bank of America Corp., the third-biggest U.S. bank by assets. China has pledged to spend 4 trillion yuan ($581 billion) to boost domestic demand. New Zealand’s central bank cut its benchmark interest rate 1.5 percentage points yesterday. India may unveil a 750 billion rupee ($15.1 billion) stimulus plan this week, the Economic Times reported yesterday, without saying where it got the information. The attacks “may cap confidence to some extent, but it should be overcome and I guess after a while we’ll be back to fundamentals,” said Sebastien Barbe, a Hong Kong-based economist at Calyon, the investment-banking unit of Credit Agricole SA. He expects the rupee to fall to 51 by the end of the year before rising to 47 by end-2009. To contact the reporter on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.

Source