Rupee Trades Near 11-Month Low on Concern Fed Will Pare Stimulus

India’s rupee traded within 0.5 percent of an 11-month low on concern the Federal Reserve will scale back asset purchases that have spurred fund flows into emerging markets.

Fed Chairman Ben S. Bernanke said last month the central bank may reduce asset purchases if there are signs of sustained improvement in the world’s largest economy. A report last week showed U.S. consumer confidence at a five-year high. India’s economy expanded less than 5 percent for a second quarter, data showed on May 31, a day after central bank Governor Duvvuri Subbarao said the nation’s balance of payments is under stress.

“Right now, there is still debate on about the outlook for policy in India and abroad, and investors will be cautious,” said Vikas Babu, a trader at state-run Andhra Bank (ANDB) in Mumbai. “We will see exporters selling dollars as well, so there should be some respite for the rupee.”

The rupee was little changed at 56.5050 per dollar as of 10:30 a.m. in Mumbai, according to data compiled by Bloomberg. It touched 56.76 on May 31, the weakest level since June 28, 2012. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell one basis point, or 0.01 percentage point, to 9.22 percent.

International investors poured almost $20 billion into India’s stocks and bonds this year, exchange data show.

Central Bank

The shortfall in India’s current account, the broadest measure of trade, probably widened to 5 percent of gross domestic product in the year ended March 31, Subbarao said on May 30. India’s gross domestic product increased 4.8 percent in the three months ended March 31 from a year earlier.

The Reserve Bank of India may have sold dollars around the 56.75 per dollar level last week to curb the rupee’s drop, J. Moses Harding, executive vice president at IndusInd Bank Ltd. in Mumbai, said on May 31. That should encourage exporters to convert overseas earnings, he said.

Three-month onshore rupee forwards traded at 57.41 per dollar, compared with 57.42 on May 31, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 57.44 versus 57.60 a month ago. 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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