India's rupee dips, shares plunge 3.5%

MUMBAI: India's currency slid yesterday and the share market crashed nearly 3.5 percent in another major sell-off caused by uncertainty in the Middle East and a new gloomy economic forecast by Goldman Sachs.
The rupee, the worst performing major currency in Asia this year, closed down 2.46 percent at Rs.67.63 to the dollar, up from the day's lows, while shares closed down 651 points or 3.45 percent to 18,234.66 points.
"In India, we have cut our full-year GDP growth forecast to four percent, from six percent," Goldman Sachs said in a note to clients.
The investment house added that the rupee was likely to reach 72 per dollar in six months' time, recovering to 70 over a 12-month horizon.
Goldman Sachs added growth could be even weaker and the rupee might fall further than its targets "especially if there are pressures on the banking and corporate sectors due to weakness in growth".
Goldman Sachs joined a string of investment houses from HSBC to Nomura which have cut their growth forecasts for the once-booming Indian economy.
The most bearish was BNP Paribas, which slashed its forecast to 3.7 percent from 5.2 percent target, saying India's "macro muddle" was nearing crisis levels.
But a top adviser to Prime Minister Manmohan Singh rejected the investment houses' dire projections.
India's economy is likely to grow around 5.5 percent this fiscal year, lifted by strong farm output, C. Rangarajan told reporters in New Delhi.
Agriculture growth should reach four-to-five percent this year, thanks to bountiful monsoon rains, boosting expansion, said Rangarajan, chairman of the Prime Minister's Economic Advisory Council. The agriculture sector grew just 1.7 percent last year.
"Even if we assume the non-farm sector will grow at the same rate as last year, the GDP growth rate would be closer to 5.5 per cent," Rangarajan said.
India's economy grew by just 4.4 percent in the first three months of the fiscal year, the slowest quarterly expansion in over four years, sparking widespread worry about its prospects.
The concern was amplified on Monday when an HSBC survey showed that India's manufacturing shrank in August for the first time in over four years.
India's growth rate slowed to decade low of five percent last year, partly due to high interest rates which weighed on demand.
Russian reports of missile launches in the Mediterranean Sea accelerated the downward trend in mid-afternoon trading.
The stock market plunge was led by banking shares on worries about the effect of corporate bad debts on their balance sheets.
The rupee's depreciation will pose a major challenge for Raghuram Rajan, the new central bank governor, who takes charge Thursday, replacing outgoing chief Duvvuri Subbarao.
"We saw a temporary recovery in the rupee," said Param Sarma, chief executive with consultancy firm NSP Forex, referring to a two-day rally late last week.
"But this could not be sustained" amid persistent concerns about the economy, Sarma said.
The currency has also been depressed by the record current account deficit — the broadest measure of trade — which has been fueled by India's massive oil import bill.