India's rupee slumped more than 1 percent to a record low against a broadly robust U.S. dollar on Monday, but strategists say it's not all gloom and doom for the battered currency.
The rupee weakened to 57.77 per dollar, taking its losses over the past month to more than 6 percent, as the greenback gained on data showing weakness in China's economy and Friday's U.S. payrolls pointing to improvements in the jobs market.
The move in the rupee comes almost a year after the currency last weakened to a record low against the dollar before bouncing back. It had been in a narrow range for much of the year before coming under pressure in early May.
Like other emerging market currencies, the rupee has been hurt by expectations for an unwinding of the Federal Reserve's monetary stimulus program as the U.S. economy rebounds and the impact that it will have on fund inflows into emerging market assets such as bonds.
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"We see the fundamentals for the rupee improving substantially in the second half of the year, the move today [Monday] doesn't change that outlook," says Deutsche Bank's chief economist Taimur Baig.
Reasons he gave for his call included a fall in the inflation rate that would help increase the appeal of rupee-denominated assets, expected improvements in India's current account deficit as the cost of importing gold falls and an expectation that the global sell-off in risk assets on concern about an unwinding of U.S. monetary stimulus is likely to abate.
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India, the world's largest gold consumer, last week raised a tax on imports of the precious metal in a bid to narrow its current account deficit. The deficit hit a record $32.6 billion in the last three months of 2012, or 6.7 percent of its gross domestic product, compared with about $22.3 billion in the previous quarter.
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The first quarter current account data are due out later this month and economists polled by Reuters expect the deficit to narrow to about $21.59 billion.
"The economy's outlook is weak and the currency will remain vulnerable to periodic policy setback and global factors," said Baig. "But the major sources of drag to the currency in recent years, high inflation and high current account deficit, are dissipating rapidly, and will help support the currency, in our view," he said, adding that he expected the rupee to rally against the dollar in the second half of the year.
India's wholesale price index, the main gauge of inflation, rose 4.89 percent in April - moving into the central bank's comfort zone of around 5 percent for the first time in over three years.
"If we have the prospect of lower inflation and gold imports come off, then that's good news for the rupee," said Samir Arora, a fund manager at Singapore-based Helios Capital.
"We're foreign investors in Indian markets so we watch the rupee very carefully, but we don't think the fall in the rupee has crossed investors' pain threshold yet," he said.
Other strategists said that while they didn't expect significant further losses for India's currency, the rupee remained vulnerable t in the near-term.
"The problem for the rupee is that India is one of the few countries in Asia with a current account deficit, so when you see capital outflows, the rupee and Indonesian rupiah tend to be vulnerable," Adarsh Sinha, head of Asia Pacific G-10 Currency research at Bank of America Merrill Lynch told CNBC's "Capital Connection."
"In an environment where markets are worried about an end to QE [quantitative easing] and a rise in global bond yields, unfortunately the rupee will be vulnerable," he added.
- By CNBC.Com's Dhara Ranasinghe; follow her on Twitter @DharaCNBC
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