Indian Rupee Snaps Five-Day Gain as Budget Deal Spurs Taper Bets

India’s rupee snapped a five-day gain on speculation a U.S. budget deal will support the world’s largest economy, making it easier to pare stimulus that has buoyed emerging markets. Government bonds rose.

Budget negotiators unveiled an agreement to ease automatic spending cuts by about $60 billion over two years and reduce the deficit by $23 billion, breaking a three-year cycle of fiscal standoffs. U.S. Senator Patty Murray, a Democrat, and Republican Representative Paul Ryan said the proposal avoids a government shutdown and helps the economy. India will release trade data for November today.

The rupee slid 0.6 percent to 61.3485 per dollar as of 9:40 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. The currency rallied 2.2 percent over the previous five days. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell five basis points to 11.67 percent.

“The U.S. budget deal, while yet to be confirmed by Congress, is a major positive for the dollar as it would remove the risk of another government shutdown, as well as bring clarity and an improved growth outlook that would encourage the Fed to start the taper,” Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB, wrote in a research note today. “This means higher risk of capital outflows from emerging markets.”

The yield on India’s 8.83 percent bonds due November 2023 fell one basis point, or 0.01 percentage point, to 8.84 percent, according to prices from the central bank’s trading system. The benchmark 10-year rate climbed to 8.91 percent on Dec. 9, the highest since Nov. 22, as speculation the Fed would taper soon pushed yields higher.

Forwards, Swaps

The Fed’s next meeting is Dec. 17-18. Policy makers are considering reducing bond purchases “in coming months” if the economy improves as it expects, the minutes of the central bank’s last session released in November showed. The monetary authority buys $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on borrowing costs.

Three-month offshore non-deliverable rupee forwards fell 0.5 percent to 62.65 per dollar, data compiled by Bloomberg show. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

India’s one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, dropped one basis point to 8.46 percent, according to data compiled by Bloomberg.

To contact the reporter on this story: Shikhar Balwani in Mumbai at sbalwani@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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