Rupee Weakens a 4th Day on Concern Inflows Will Slow; Bonds Gain

India’s rupee fell for a fourth day, the longest losing streak since February, on concern capital inflows will slow after the central bank said it sees limited room to adjust policy to spur the economy. Bonds gained.

Reserve Bank of India Governor Duvvuri Subbarao, who cut interest rates on May 3 for a third time this year, said in an interview with Bloomberg TV India a day later that the odds of further monetary easing are “practically non-existent.” A drop in fund inflows would leave the rupee more vulnerable to India’s current-account deficit, according to Federal Bank Ltd. (FB) The shortfall in the broadest measure of trade widened to a record $32.6 billion in the last quarter of 2012.

“The biggest concern for the Indian economy and the rupee is the current-account deficit,” said Ravi Ranjit, chief manager in Mumbai at Federal Bank. “A more dovish rhetoric from the RBI might have brought in some more inflows, but unless the deficit contracts, the rupee will stay under pressure.”

The rupee declined 0.2 percent to 54.32 per dollar as of 9:38 a.m. in Mumbai, the longest losing streak since Feb. 11, according to data compiled by Bloomberg. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell six basis points to 8.52 percent.

Foreigners added $1.2 billion to their holdings of Indian equities last month, the least since June, exchange data show.

The central bank lowered its repurchase rate to 7.25 percent from 7.5 percent last week, taking this year’s reduction to 75 basis points, or 0.75 percentage point.

Rate Outlook

“The baseline case is that the possibility of easing is practically non-existent,” Subbarao said in the Bloomberg TV interview. Any expectation that the outlook is for “another salvo” of loosening is “inaccurate,” he said, adding inflation and the current-account gap will determine future policy changes.

The current-account gap probably widened to an all-time high of around 5 percent of gross domestic product in the fiscal year ended March 31, the governor said in a conference call with analysts yesterday, adding that the deficit is expected to shrink in the current period.

The RBI will buy as much as 100 billion rupees ($1.8 billion) of debt due in 2017, 2024, 2025 and 2032 today, the monetary authority said in an e-mailed statement after the market closed on May 3.

The yield on the 8.15 percent bonds due June 2022 dropped to 7.74 percent from 7.75 percent yesterday in Mumbai, according to the central bank’s trading system.

Three-month onshore rupee forwards traded at 55.33 per dollar, compared with 55.19 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.03 versus 54.90. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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