India’s Rupee Set for Worst Week Since 1993 on Fed Stimulus Risk

India’s rupee plunged 4.4 percent to a record this week in its worst performance since 1993 on signs the U.S. is getting closer to reducing stimulus that fueled demand for emerging-market assets.

Federal Reserve policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing bond purchases later this year if the economy improves, with a few saying tapering might be needed soon, according to the minutes of their July meeting released Aug. 21. Global funds cut holdings of Indian debt by $9.9 billion since Bernanke first flagged possible paring on May 22, leaving the rupee vulnerable to the nation’s record current-account deficit.

“The rupee’s levels reflect lack of flows in the market,” said Mirza Baig, head of foreign-exchange and interest-rate strategy in Singapore at BNP Paribas SA. “Indian authorities should just allow the currency to find its own value.”

The rupee fell to 64.4650 per dollar this week as of 10:29 a.m. in Mumbai and touched an unprecedented 65.56 yesterday, according to prices from local banks compiled by Bloomberg. It was the biggest weekly loss since March 1993. The currency rose 0.2 percent today.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 408 basis, or 4.08 percentage points, from Aug. 16 to 16.80 percent.

India’s current-account deficit widened to a record 4.8 percent of gross domestic product in the year ended March 31.

Excessive Pessimism

Finance Minister Palaniappan Chidambaram and Reserve Bank of India Governor Duvvuri Subbarao held coordinated briefings in New Delhi yesterday to try to soothe investors’ nerves. Data due Aug. 30 may show India’s economy expanded 4.7 percent in the quarter ended June 30, slower than 4.8 percent in the previous period, according to the median estimate of 14 economists surveyed by Bloomberg.

Excessive pessimism is unwarranted, economic expansion will pick up as the year progresses and the rupee’s drop has overshot appropriate levels, Chidambaram said. In its annual report released in Mumbai yesterday, the central bank said the nation’s economic and monetary policies must focus on preserving financial stability.

The RBI said Aug. 20 it will start buying government debt to pump funds into markets and consider reducing weekly sales of cash-management bills to rein in a surge in bond yields. The central bank engineered a cash crunch in Asia’s third-largest economy last month to shore up the rupee.

Yield Surge

India’s 10-year local-currency sovereign debt yield touched 9.48 percent on Aug. 20, the highest since 2001, data compiled by Bloomberg show. The yield has since retreated to 8.29 percent.

The cost to protect State Bank of India’s bonds from default climbed 70 basis points this week to 370 basis points, prices from CMA show. The insurance rate reached 372 on Aug. 20, the highest since June last year. The lender is seen as a proxy for the Indian government by some investors.

“The less the authorities do about saving the rupee, the better it is,” BNP’s Baig said. “What they are doing is having no effect, they’re losing their credibility, and raising the risk of a credit-rating downgrade.”

Fitch Ratings said yesterday that recent pressures on India’s markets aren’t a trigger for rating action at this point. Moody’s investors Service reiterated its stable outlook on the nation’s rating on Aug. 19, while analyst Atsi Sheth said in an e-mail that inflows are unlikely to accelerate unless the growth outlook improves.

Three-month onshore rupee forwards rose 0.6 percent to 65.97 per dollar today, data compiled by Bloomberg show. Offshore non-deliverable contracts climbed 0.7 percent to 66.28. 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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