Rupee Drops to Record on Fed Tapering Concern

India’s rupee plummeted past 64 per dollar for the first time on concern foreign outflows will accelerate as the Federal Reserve prepares to trim stimulus.

Overseas funds have pulled about $12 billion from local debt and equities since May 22 when Fed Chairman Ben S. Bernanke first signaled the central bank may pare its $85 billion monthly bond-buying program. The Fed may start tapering in September, 65 percent of analysts surveyed by Bloomberg said this month.

The rupee, which sank as much as 1.5 percent to touch an unprecedented 64.12 a dollar, pared most of the losses on speculation the Reserve Bank of India intervened to arrest the slide, said two traders with knowledge of the matter, asking not to be named as the information isn’t public. It ended the day at 63.23.

“Financial markets have developed something of an obsession with the Federal Reserve’s likely tapering,” ABN Amro Group NV analysts Georgette Boele and Nick Kounis wrote in a report today. “We expect a strong U.S. employment report and the Fed to announce a tapering of asset purchases at the September” policy meeting, they wrote, adding that the dollar is likely to rally.

One-month implied volatility for the rupee, a measure of expected moves in the exchange rate used to price options, rose 1 basis point, or 0.01 percentage point, to 14.95 percent, data compiled by Bloomberg show. The currency’s spot rate 2.3 percent yesterday, the most since September 2011.

No Fix

The slowest economic growth in a decade and a record current-account deficit have left Asia’s No. 3 economy vulnerable to a pullout of funds. Pictet Asset Management SA sees no immediate policy fix as demand collapses for Indian rupee bonds, while UBS AG says a drop in the currency to 70 per dollar is possible.

The Reserve Bank of India on Aug. 14 announced measures to limit foreign-currency outflows from local companies and residents, and boosted efforts to lure investment. India will seek to increase capital inflows with steps including allowing state-owned financial companies to issue “quasi-sovereign” bonds to finance long-term infrastructure investment, Finance Minister Palaniappan Chidambaram said Aug. 12.

This followed the RBI’s efforts last month to stem currency depreciation through an increase in two interest rates and by draining liquidity from the banking system.

“The rupee is at risk of completely losing its anchor,” Bhanu Baweja, the global head of emerging-market cross-asset strategy at UBS, said in an interview with Bloomberg TV India yesterday. “You’re in a situation where no rupee forecast is sacrosanct.”

Debt Holdings

Global funds cut holdings of local debt to a 19-month low of $28.4 billion on Aug. 13 as the U.S. prepares to withdraw monetary stimulus that boosted demand for emerging-market assets. U.S. home sales are forecast to climb to a three-year high, according to a survey before data due tomorrow.

“We continue to believe that tapering will begin at the September meeting and, hence, support the U.S. dollar, especially against high-yielding currencies,” Barclays Plc analysts Sudakshina Unnikrishnan and Hamish Pepper wrote in an e-mailed report yesterday. “Weakness in the rupee has been particularly pronounced following a continued sell-off in Indian government bonds.”

Three-month onshore rupee forwards fell 1.1 percent to 65.15 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts declined 1.1 percent to 65.30. 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: Shikhar Balwani in Mumbai at sbalwani@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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