India’s Rupee Set for Second Monthly Gain as Stock Inflows Surge

India’s rupee headed for a second monthly gain as the Federal Reserve’s decision to maintain its stimulus boosted foreign purchases of emerging-market stocks.

Global funds bought a net $2.5 billion of Indian shares this month, exchange data show, as the S&P BSE Sensex Index (SENSEX) climbed to a record close yesterday. The Fed yesterday reiterated it will keep buying $85 billion of bonds a month. The Reserve Bank of India’s offer of concessional swaps for dollars raised by local banks will attract about $15 billion, according to two officials with knowledge of the matter.

“The recent correction in the rupee is more because of global risk-on and foreign flows, which tend to be unreliable,” said Samir Lodha, senior partner at QuantArt Market Solutions Pvt. in Mumbai. “However, a resolute and confident RBI is a big positive in itself since India holds ample currency reserves” and the rupee’s plunge to a record was partly a “crisis of confidence,” he said.

The rupee rose 2.1 percent this month to 61.3300 per dollar as of 9:50 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. It fell 0.1 percent today.

The $15 billion projection for the swap program would exceed both the RBI and government’s earlier expectations, said the officials with direct knowledge of the matter, asking not to be identified as the information is private.

India’s currency rebounded 12.3 percent from a record low of 68.845 per dollar reached on Aug. 28. RBI Governor Raghuram Rajan said Oct. 29 the swap window attracted $12 billion. The facility was announced on Sept. 4 and is due to end on Nov. 30.

One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, dropped 578 basis points, or 5.78 percentage points, to 9.65 percent in October, the lowest level since June.

Monetary Policy

“Normalcy” will be restored to the currency market only when the RBI stops supplying dollars directly to oil refiners and ceases to divert inflows into its coffers, Rajan said in a call with analysts yesterday.

The RBI on Oct. 29 raised its benchmark repurchase rate to 7.75 percent from 7.50 percent to fight accelerating inflation, while further easing emergency liquidity curbs that were imposed in July to support the rupee. It cut its growth forecast for the year through March 2014 to 5 percent from 5.5 percent.

The Fed is seeking to shield the U.S. economy from the impact of this month’s partial government shutdown. The 16-day closing reduced growth by 0.3 percentage point this quarter, according to the median estimate in an Oct. 17-18 Bloomberg survey.

Three-month onshore rupee forwards fell 0.1 percent today to 62.62 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts declined 0.1 percent to 62.79. 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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