JPMorgan lowers 2008 India rupee forecast to 40/dlr

MUMBAI (Reuters) - JPMorgan Chase Bank has lowered its 2008 forecast for the rupee to 40 per dollar from 39 earlier as a widening current account deficit and outflows weigh on the currency, which lost 1.7 percent this week.

The rupee fell to 42.35/36 per dollar for the first time in 13 months and has fallen nearly 7 percent so far in 2008, making it Asia's second- worst performing currency with the fall gathering pace this month.

Siddharth Mathur and Vikas Agarwal, strategists at the bank expect the rupee to hit 42.5 per dollar in the near-term and recommend investors hold on to a call option on the U.S. dollar versus the rupee to benefit from the currency's fall.

"The factors that have contributed to the recent up move are largely intact: deteriorating current account dynamics, muted capital inflows, sidelined exporters and lack of any policy intervention," they wrote in a note on Wednesday.

The trade deficit has widened by more than a third to $80.4 billion in 2007/08. Foreign funds sold $3 billion of shares so far in 2008, compared to 2007's record purchase of $17.4 billion.

The U.S-based bank bought a call option for an unspecified amount on the dollar with a strike price of 40.75 and sold 1.5 times the amount in a put option at a strike price of 39.50 at end-March, they said in the note.

Buying a call option gives the holder the right but not the obligation to buy a security at a specified price at a point in time while selling a put option allows an investor to benefit from a drop in prices below a particular level.

Buying and selling options on the same date at different strike prices are done to reduce cost of funding the call option.

It has exited its sold dollar-put option as holding such a position exposes the holder to unlimited risks and booked profits on half its dollar-call option for a net gain of 1.13 rupees, JPMorgan said.

But it has held on to its balance dollar-call option to position itself from a further downside in the rupee, the analyst said in the report.