India’s rupee completed its biggest monthly loss since May after the International Monetary Fund and the central bank forecast the slowest economic growth for the nation in almost a decade.
Gross domestic product will rise 5.8 percent in the year through March, versus a July forecast of 6.5 percent, the Reserve Bank of India said in a statement yesterday. That would be the least since 2003. The BSE India Sensitive Index (SENSEX) of shares plunged to a six-week low yesterday after the RBI held borrowing costs, resisting Finance Minister Palaniappan Chidambaram’s call for cheaper credit to back a recent policy revamp that included cutting fuel subsidies and allowing more foreign investment.
“Without the euphoria and distraction of the government’s reform announcements, the RBI clearly spelt out its number one priority, which is inflation,” Charlie Lay, an economist and currency strategist at Commerzbank AG in Singapore, wrote in a research report today. The focus on inflation suggests the central bank will want to prevent the rupee from weakening too much, he wrote.
The rupee declined 1.8 percent this month to 53.8150 per dollar in Mumbai, according to data compiled by Bloomberg. The currency, which rose 0.3 percent today, touched 54.2075 earlier, the weakest level since Sept. 21. Lay forecast the rupee would trade between 52 and 54 in the coming months.
One-month implied volatility, a measure of exchange-rate swings used to price options, fell 40 basis points today to 9.90 percent. The rate dropped 160 basis points, or 1.6 percentage points, in October.
Asia’s third-largest economy will grow 4.9 percent in 2012, the IMF said in an Oct. 9 report, less than the 6.1 percent it predicted in July.
Policy makers will seek to limit the rupee’s depreciation as a weaker currency will increase the nation’s import bill and fuel consumer-price gains, according to Commerzbank. Inflation accelerated to 7.81 percent in September, data showed Oct. 15, the fastest pace this year. The trade deficit widened to the highest level in more than a year in September as exports fell 10.8 percent from a year earlier.
Three-month onshore rupee forwards were at 54.71 per dollar compared with 54.92 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 54.63 versus 54.89. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
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