Rupee, bonds continue to fall; foreign fund flows key

By Swati Bhat

MUMBAI (Reuters) - The rupee hit a new 13-month low on Wednesday, while bonds and shares fell to their weakest this month on concerns a brewing financial crisis in Russia would spark foreign selling even in India, one of the star performers among emerging markets this year.

Overseas investors sold Indian shares worth $196.56 million on Tuesday, their biggest daily net sales since Oct. 17, and a sixth consecutive day of selling, according to exchange data.

Foreign investors also turned sellers of debt for the first time in December on Monday, having sold a net $146.56 million, with caution ahead of the U.S. Federal Reserve policy meet outcome later on Wednesday also weighed on sentiment.

The RBI was spotted intervening in the spot foreign exchange market, according to traders, although they said the action was not too aggressive.

Traders fear more foreign selling, but doubt it would spark turmoil anywhere similar to last year when India suffered its worst market crisis since 1991. Unlike then, India has been seen as benefitting from sharp falls in inflation, hefty foreign exchange reserves, and a less troublesome current account gap.

"I won't compare this to last year but sentiment does play a role. We can expect December to remain choppy," said Paresh Nayar, head of fixed income and currencies at First Rand Bank.

The partially convertible rupee was trading at 63.62/63 per dollar by 11:05 a.m. (0535 GMT), after weakening to as much as 63.89, its lowest level since Nov. 13, 2013. It had closed at 63.53/54 on Tuesday.

Analysts say India is better placed to withstand foreign selling, given the current account deficit has narrowed sharply to 2.1 percent of gross domestic product in the July-September quarter from a record high of 4.8 percent in the fiscal year ended in March 2013.

Meanwhile, foreign currency reserves stood at $314.66 billion as of Friday, not far from the record high of $320.785 billion in September 2011.

India has also attracted a combined $43.2 in foreign flows into debt and shares so far this year. As a result, the Nifty is still up around 25 percent this year, the second-best performer in Asia in dollar terms.

Still, foreign selling would spark concerns of a delay in interest rate cuts at a time when consumer inflation has slumped and economic growth has stagnated at around 5 percent.

The benchmark 10-year bond yield hit a session high of 8.03 percent, its highest level since Dec. 1, before retreating to trade flat on the day at 7.99 percent. At current levels, the yield is up 16 basis points on the week.

(Editing by Rafael Nam and Sunil Nair)