India Rupee Gains, Bonds Plunge After RBI Further Tightens Cash

India’s rupee snapped a two-day loss and benchmark bonds plunged to the lowest level in more than a year after the monetary authority took steps to further restrict banks’ access to cash to arrest the currency’s slide.

The Reserve Bank of India capped the amount lenders can borrow in daily repurchase auctions at 0.5 percent of their deposits, it said in a statement yesterday. The move prompted the overnight interbank call money rate to surge today to 9.25 percent, the highest since March 2012, according to data compiled by Bloomberg. The RBI also raised the daily balance requirement for lenders’ cash-reserve ratio to 99 percent from 70 percent effective July 27, while separately announcing an auction of 60 billion rupees of cash-management bills tomorrow.

“Money-market rates have spiked and it’s anyone’s guess how this will play out on growth and the markets,” said Paresh Nayar, head of currency and money markets at the Indian unit of FirstRand Ltd. (FSR) in Mumbai. “Demand for dollars in the currency market is intact” due to the current-account deficit, he said.

The rupee advanced 0.5 percent to 59.4950 per dollar as of 9:57 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. The currency, which dropped to a record 61.2125 on July 8, has weakened 8.6 percent in the past three months on concern the U.S. will pare stimulus that drove demand for emerging-market assets.

The yield on the 7.16 percent bonds due May 2023 rose 25 basis points, or 0.25 percentage point, to 8.43 percent, according to the central bank’s trading system. That’s the highest for a benchmark 10-year note since May 2012.

Rupee Vulnerable

Global funds have cut holdings of Indian debt by $8.8 billion since May 22, when Federal Reserve Chairman Ben S. Bernanke first signaled the central bank may curb bond buying. The outflows leave the rupee vulnerable to a current-account shortfall that widened to an unprecedented 4.8 percent of gross domestic product in the year ended March 31.

To limit the rupee’s drop, which threatens to stoke inflation in a nation that imports 80 percent of its oil, the RBI on July 15 raised two interest rates and moved to drain money through bond sales. The central bank kept its main repurchase rate unchanged at 7.25 percent as the economy grows at the slowest pace in a decade.

Three-month onshore rupee forwards rose 0.2 percent to 60.92 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts gained 0.4 percent to 60.73. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

To contact the reporters on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net; Kyoungwha Kim in Singapore at kkim19@bloomberg.net

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

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