India’s rupee dropped for a second week on concern faster inflation will prompt the central bank to boost borrowing costs, putting at risk an economy that’s growing at the slowest pace in a decade.
The Reserve Bank of India will increase its benchmark repurchase rate to 7.75 percent from 7.50 percent at an Oct. 29 review, according to 16 of 20 economists in a Bloomberg survey. One predicts an increase to 8 percent and three see no change. Governor Raghuram Rajan may raise his inflation forecast for the year through March 2014 to above 6 percent from “around 5 percent,” and scale back its economic-growth estimate to 5 percent from 5.5 percent, according to DBS Bank Ltd.
The rupee fell 0.4 percent from a week ago to 61.49 per dollar as of 9:38 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. It was steady today.
“The focus will entirely be on the RBI policy review,” Radhika Rao, an economist at DBS Bank in Singapore, wrote in a research report today. “Affirming the governor’s stance as an inflation hawk, the vote could swing to a 25 basis point hike in the repo rate. The new approach is likely to be focused primarily on price stability.”
One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, fell 130 basis points, or 1.3 percentage points, from Oct. 18 to 11.65 percent, according to data compiled by Bloomberg. The rate rose 13 basis points today.
The rupee also fell amid speculation the RBI is looking at ending an emergency facility under which it has directly sold dollars to state refiners since late August, a move that would increase demand for the greenback in the spot market.
The facility stays operational and “any tapering of the window, as and when it occurs, will be done in a calibrated manner,” the RBI said in an Oct. 18 statement on its website.
“The possibility that the oil swap window could be unwound might add buoyancy to the dollar against the rupee,” Rao at DBS wrote in the report.
Three-month onshore rupee forwards slipped 0.1 percent today to 62.90 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts weakened 0.2 percent to 63.01. 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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