Fed Bank of San Francisco President John Williams said yesterday that the central bank may reduce its $85 billion in monthly bond-buying as early as this summer amid signs the economy is gaining strength. India’s highest interest rate among Asia’s largest economies will attract foreign capital, limiting the rupee’s losses, according to DBS Bank Ltd. Global funds boosted holdings of Indian debt to a record $37.8 billion on May 15, exchange data show, as the 10-year sovereign note offers 547 basis points more than similar-maturity U.S. Treasuries.
Positive rate differentials “helped the economy attract sufficient capital inflows to fund the current-account deficit,” analysts at DBS, including Singapore-based David Carbon, wrote in a report today. “A wildcard here, is the recent volatility seen in the broad dollar tone, which will be contingent on the Fed’s plans to tinker with the quantitative-easing program.”
The rupee declined 0.4 percent to 54.9950 per dollar as of 9:46 a.m. in Mumbai, the biggest drop since May 10, according to data compiled by Bloomberg. The currency fell 0.4 percent this week. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell four basis points today, or 0.04 percentage point, to 8.32 percent.
The Dollar Index, which tracks the greenback against six major counterparts, climbed 0.9 percent this week. The tone on asset purchases will probably be set by Fed Chairman Ben S. Bernanke’s testimony to the Joint Economic Committee next week, according to DBS.
India’s current-account deficit widened to a record of around 5.1 percent of gross domestic product in the year ended March 31, the government estimates.
Three-month onshore rupee forwards traded at 55.89 per dollar, compared with 55.73 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.76 versus 55.54. 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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