India’s rupee strengthened beyond 63 per dollar after former U.S. Treasury Secretary Lawrence Summers withdrew from the list of people being considered for the Federal Reserve chairman’s post. Government bonds advanced.
A Bloomberg Global Poll last week showed Summers would cut stimulus more than current Fed Vice Chairman Janet Yellen, who is among the front runners to replace Chairman Ben S. Bernanke when his term ends in January. The Fed will probably trim its monthly bond-buying program by $10 billion to $75 billion this week, a survey of economists showed this month. The rupee and 10-year notes pared gains intraday after data showed India’s inflation unexpectedly quickened to a six-month high in August.
The currency climbed 1 percent to 62.8450 per dollar in Mumbai, the strongest level since Aug. 16, according to prices from local banks compiled by Bloomberg. One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, slumped 45 basis points to 17.51 percent.
“High odds of Yellen’s election reduce somewhat the risk” of outflows of capital which India relies on to plug its current-account gap, Credit Agricole CIB analysts led by Paris-based head of emerging markets research and strategy Sebastien Barbe wrote in a report today. “The rupee is likely to lead gains in regional currencies.”
The yield on India’s 7.16 percent sovereign bonds due May 2023 dropped six basis points, or 0.06 percentage point, to 8.43 percent, the lowest since Sept. 5. The rate climbed as high as 8.54 percent after government data showed India’s wholesale-price index jumped 6.1 percent in August from a year earlier, compared with 5.79 percent in July.
Bonds rose also as the Securities & Exchange Board of India, the capital markets regulator, allowed global funds to buy sovereign notes without purchasing debt limits till the overall investment reaches 90 percent of the cap, according to a Sept. 13 statement. The move is likely to reduce volatility in yields, HDFC Securities Ltd. wrote in a note.
The rupee completed its biggest weekly gain since October 2009 on Sept. 13 on optimism steps announced by the new Reserve Bank of India governor will boost the supply of dollars. In his first speech upon taking office on Sept. 4, Raghuram Rajan offered to sell concessional swaps for lenders’ foreign-currency deposits and vowed to curb inflation. The steps will boost India’s reserves by $10 billion, Bank of America Merrill Lynch estimates.
The yield on the 10-year bonds slid 14 basis points last week as investors speculated the rupee’s rebound may prompt the central bank to reverse liquidity-tightening measures taken to support the currency.
The recent RBI policies “are near-term positives for the rupee,” Barclays Plc analysts, including London-based Christian Keller, wrote in a report last week. “However, it remains to be seen whether these measures will translate into better sentiment and a pick-up in portfolio inflows in the context of Fed tapering later this month.”
Overseas funds have cut holdings of Indian debt by about $10.5 billion since May 22, when Bernanke first flagged a potential cut in asset purchases that had fueled demand for emerging-market assets. U.S. policy makers will meet Sept. 17-18 and the Indian central bank will review policy Sept. 20.
Rajan took charge as the rupee sank to a record 68.845 per dollar on Aug. 28 even after a series of measures by policymakers to stem its slide. The RBI raised two interest rates in July to increase shorter term borrowing costs and capped cash injections into the banking system, seeking to curb the supply of rupees.
Prime Minister Manmohan Singh’s economic advisory body last week said the nation’s monetary stance must continue until the rupee stabilizes. Policy easing is possible subsequently if wholesale inflation moderates, it said. Every 10 percent drop in the rupee adds as much as 80 basis points to WPI inflation, Nomura Holdings Inc. estimates. Rajan will keep the benchmark repurchase rate at 7.25 percent, Standard Chartered Plc and Morgan Stanley said.
Three-month onshore rupee forwards jumped 1 percent to 64.43 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts advanced 0.9 percent to 64.67. 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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