India Rupee Rises to Two-Week High After RBI Moves; Bonds Fall

India’s rupee advanced to the highest level in more than two weeks after the central bank raised two interest rates to support the currency. The benchmark government bond due 2022 fell for a fourth day.

The Reserve Bank of India increased the marginal standing facility rate and the bank rate to 10.25 percent from 8.25 percent, according to a July 15 statement. The monetary authority said also that it will sell 120 billion rupees ($2 billion) of bonds maturing between 2017 and 2030 through open-market operations tomorrow. The measures will stay in place at least until September, when the central bank may get clarity on when the Federal Reserve plans to pare its stimulus program, according to Kotak Mahindra Bank Ltd. (KMB)

The RBI is looking to “contain foreign-exchange volatility by squeezing out liquidity,” said Indranil Pan, an economist at Kotak Mahindra Bank in Mumbai. “Short-end rates are likely to rise to at least 10.25 percent, leading to a transmission to other interest rates in the economy.”

The rupee gained 0.2 percent to 59.2250 per dollar as of 10:06 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. It touched 59.0450, the strongest level since July 1, after rising yesterday by the most this month. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, climbed four basis points, or 0.04 percentage point, to 12.53 percent.

The rupee sank to a record 61.2125 on July 8 after the Fed signaled it may reduce asset purchases, potentially damping the flow of funds to emerging markets. Fed Chairman Ben S. Bernanke will appear before the House Financial Services Committee today and senators tomorrow to present the semi-annual monetary policy report.

Lending Cap

The RBI said it will cap the amount it will lend to commercial banks through the daily repurchase window to around 750 billion rupees from today. This compares with an average 872 billion rupees borrowed each day this year through July 15, according to central bank data.

“These measures should not be read as a prelude to any policy rate changes,” Finance Minister Palaniappan Chidambaram told reporters in Jaipur yesterday. “These measures in no way affect our commitment to growth.”

The steps are being taken to quell excessive speculation and reduce volatility and stabilize the rupee, he added.

The yield on the 8.15 percent bonds due June 2022 rose five basis points to 8.25 percent, according to the central bank’s trading system. The rate surged 52 basis points yesterday, the biggest yield increase for a benchmark 10-year security since January 2009.

Special Repo

The RBI will conduct a special three-day repo to add as much as 250 billion rupees at 10.25 percent so banks can meet the liquidity needs of mutual funds, the monetary authority said in a statement today. The facility will be temporary and details will be provided later, it added.

India’s government has proposed easing foreign-direct investment limits in some industries as part of measures to draw capital inflows and revive economic growth. Among the decisions taken at a meeting led by Prime Minister Manmohan Singh was a plan to allow overseas investors to own all of a phone carrier, Commerce Minister Anand Sharma told reporters yesterday. The changes would also permit foreign investment in defense production exceeding the current 26 percent cap if India gains access to modern technology.

“The measures are good in the long term, but may not provide any dollars in the short term,” said Samiran Chakraborty, an economist at Standard Chartered Plc in Mumbai.

Three-month onshore rupee forwards fell 0.05 percent to 60.46 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts dropped 0.2 percent to 60.49. 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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