NEW DELHI -- The Indian rupee fell to a near 30-month low against the U.S. dollar Friday as risk appetite in Asia remained jittery ahead of a key European Union summit, before pulling back a tad, even as the government flagged its concern over the falling local unit.
The falling rupee could bloat India's already mammoth import bill and further strain government finances as the fuel subsidy burden swells, federal Finance Secretary R.S. Gujral said Friday.
"Obviously it is a concern. Depreciation of the rupee impacts our imports and our import bill," Mr. Gujral said.
While the falling rupee would help exporters, it would swell subsidies in Asia's third-largest economy, which imports nearly 75% of its fuel.
India had budgeted to spend 4.3 trillion rupees ($87.75 billion) on subsidies in the fiscal year ending March 31, 2012, mostly for fuel, fertilisers and food. However, elevated crude oil prices, are likely to push New Delhi to spend an additional 400 billion rupees on fuel subsidies alone.
Separately, Finance Minister Pranab Mukherjee said he will discuss the rupee's recent weakness with the central bank governor.
The comments come after the rupee plunged to a near 30-month low earlier Friday, as risk-sensitive currencies showed signs of weakness on growing doubts of a resolution to the European sovereign debt crisis ahead of a key European Union summit later this week.
The move also highlights a key trend in recent months--the rupee has been among the most risk-sensitive currencies in emerging Asia, and has tended to overshoot declines in other currencies, making it the worst-performing currency in the continent.
That's partly because of India's yawning twin deficits--the current account gap and the fiscal deficit.
India has the largest current account deficit in Asia, and that's been financed by capital inflows so far, said Chin Loo Thio, a currency strategist at BNP Paribas.
But capital inflows are showing signs of reversing as economic growth moderates. Overseas investors have pulled out a net $84 million from local stock markets this year, a sharp shift from the more than $29 billion that they pumped in last year, according to stock exchange data.
With global risk appetite proving volatile and local growth slowing, capital inflows could remain under pressure, leaving the rupee likely to underperform the rest of emerging Asian currencies for the rest of the year, Thio said.
That could prompt the central bank to intervene to slow the rupee's fall and protect importers from currency volatility, said Anubhuti Sahay, an economist at Standard Chartered Bank.
Ms. Sahay expects the U.S. dollar to test 51 rupees by the end of December, from 50.18 rupees mid-session Friday.
Write to Prasanta Sahu & Bijou George at sourav.mishra@dowjones.com
