India’s rupee rose to a five-week high after the central bank took steps to tighten cash supply and arrest a slide in the currency.
The currency has advanced 1.5 percent against the dollar since the Reserve Bank of India further restricted banks’ access to funds late on July 23, paring its decline this year to 6.6 percent. The rupee weakened as much as 0.4 percent earlier after a report showed sales of new U.S. homes increased to the highest level in five years in June, potentially bolstering the case for the Federal Reserve to cut stimulus that has driven demand for emerging-market assets.
“Recent measures announced by the RBI to curb liquidity and stabilize the rupee are likely to provide some support,” L. Subramanian, an analyst at ICICI Bank Ltd. in Mumbai, wrote in a report today. Increased speculation the Fed will taper had weighed on the Indian currency, he wrote.
The rupee advanced 0.4 percent to 58.87 per dollar as of 10:50 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. The currency touched 58.865 earlier, the strongest level since June 19. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 16 basis points to 11.4 percent, according to data compiled by Bloomberg.
Global funds have cut holdings of Indian debt by $8.8 billion since May 22, when the Fed first signaled it could curb asset purchases this year should economic risks subside. Data today will show claims for jobless benefits in the U.S. fell, the median estimate in a Bloomberg survey shows. The Fed will start trimming its $85 billion in monthly bond buying, known as quantitative easing, in September, according to 50 percent of economists surveyed by Bloomberg News between July 18 and 22.
The RBI capped the amount lenders can borrow in daily repurchase auctions at 0.5 percent of their deposits, it said in a July 23 statement. The authority also raised the daily balance requirement for lenders’ cash-reserve ratios to 99 percent from 70 percent effective July 27, while separately announcing an auction of 60 billion rupees ($1 billion) of cash-management bills today.
The moves follow steps announced July 15, when the RBI raised two interest rates and drained money through bond sales. The central bank kept its main repurchase rate at 7.25 percent as the economy grows at the slowest pace in a decade.
“As money-market liquidity tightens, the cost of carrying a speculative position in anticipation of further rupee weakness increases significantly,” economists at Barclays Plc, including Siddhartha Sanyal in Mumbai, wrote in a research report yesterday. “While the current moves should push short-term interest rates higher and make foreign-exchange speculation costlier, we don’t think that such speculation is the key driver of current rupee weakness. Accordingly, we do not gain much confidence that these measures will effectively curb pressures on the rupee.”
Three-month onshore rupee forwards rose 0.2 percent to 60.39 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts rose 0.3 percent to 60.24. 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 email@example.com