India’s rupee completed its third weekly gain, the longest winning streak since February, after the central bank tightened the supply of cash to arrest a slide in the currency.
The Reserve Bank of India has raised two interest rates and restricted lenders’ access to funds in the past two weeks, pushing the benchmark 10-year bond yield to a 14-month high and leading to debt-sale failures. The measures “should be seen not as a precursor to a substantial change in monetary stance, which, thus far, has been on the easing side,” Raghuram Rajan, the top adviser in the finance ministry, said yesterday in an interview with Bloomberg India TV. The steps should be sufficient, he said.
“Such comments are, indeed, what markets would like to hear, as they improve communication of policy intentions,” Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong, said in an e-mail interview today. “The measures amount to significant tightening and were a mistake as their negative impact on market rates, confidence and growth will be bigger than the positive impact on the rupee.”
The rupee advanced 0.5 percent this week to 59.0425 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. The currency, which plunged to an unprecedented 61.2125 on July 8, rose 0.1 percent today and touched 58.7025, the strongest level since June 19.
Global funds have cut holdings of Indian debt by $9 billion since May 22, when the Federal Reserve first signaled it could curb asset purchases that have boosted demand for emerging-market assets.
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. The moves follow steps announced July 15, when the RBI raised its bank rate and marginal standing facility rate to 10.25 percent from 8.25 percent. It left the main repurchase rate unchanged as the economy grows at the slowest pace in a decade.
One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 15 basis points, or 0.15 percentage point, this week to 11.65 percent. The rate fell 10 basis points today.
“By stabilizing the rupee, we will also enhance the possibility of stronger growth,” the finance ministry’s Rajan said. “Because the inflationary consequence will be contained and, hopefully over time, that will give RBI room to be more accommodative.”
Rajan’s comments probably aim to “calm the market’s nerves,” Credit Agricole’s Kowalczyk said. The RBI will keep the benchmark rate at 7.25 percent at a July 30 review, according to all 28 estimates in a Bloomberg survey.
Three-month onshore rupee forwards were little changed today at 60.60 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts were steady at 60.40. 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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