Rupee Headed for Third Annual Loss as Bonds Fall Most Since 2009

India’s rupee headed for a third annual loss on concern fund outflows fueled by the imminent U.S. stimulus tapering will leave the currency more vulnerable to the nation’s current-account deficit.

The rupee, which plunged to a record 68.845 per dollar in August, is the second-worst performer this year among Asian currencies excluding the Japanese yen. The Federal Reserve said Dec. 18 it will start paring debt purchases that have driven funds to high-yielding assets. India’s 10-year bonds are poised for the biggest annual loss since 2009 after foreign investors cut holdings of local notes by almost $8 billion in 2013.

The Indian currency weakened 11.2 percent this year to 61.8875 per dollar as of 10:39 a.m. in Mumbai, and was little changed today, according to prices from local banks compiled by Bloomberg. It rose 1.2 percent this quarter.

“It’s been a roller coaster ride in 2013,” said Ashtosh Raina, head of foreign-exchange trading at HDFC Bank Ltd. in Mumbai. “The year 2014 should be much better as most of the uncertainties are out of the way.” He predicted the rupee will trade between 55 and 63 per dollar next year.

The rupee has rebounded 11.2 percent from its all-time low on Aug. 28 as the central bank put in place measures to boost dollar supply and the government curbed gold exports to shore up the trade and current accounts. The Reserve Bank of India’s offer of concessional foreign-exchange swaps for overseas deposits and debt raised by banks attracted $34 billion, more than double Morgan Stanley’s $15-billion estimate.

Current Account

The current-account gap will narrow to less than 3 percent of gross domestic product in the year ending March 2014, RBI Governor Raghuram Rajan said this month, from an unprecedented 4.8 percent in the previous fiscal year.

The rupee trimmed the year’s declines as Rajan stepped up efforts to counter inflation that has eroded returns for savers and investors. He raised the benchmark repurchase rate 50 basis points, or 0.5 percentage point, since mid-September to 7.75 percent to rein in wholesale prices that rose 7.52 percent in November, the most in 14 months.

One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, slid 191 basis points this month and 12 basis points today to 10.35 percent, compared with this year’s high of 22.78 percent in August.

Ten-year government bond yields surged 79 basis points this year, the most since 2009, and 10 basis points this month. The rate on the 8.83 percent sovereign notes due November 2023 slipped two basis points today to 8.84 percent in Mumbai, according to prices from the central bank’s trading system.

Bond Holdings

Foreigners have cut ownership of Indian debt to about $25 billion from a record $38.5 billion in May, when the Fed first signaled a reduction in its stimulus program. The U.S. central bank will reduce its monthly bond purchases to $75 billion from $85 billion starting January, it said Dec. 18 while pledging to hold interest rates close to zero.

“Bond markets were impacted in 2013 by the currency and the Fed,” HDFC Bank’s Raina said. “Things should be a lot more stable in the new year and yields could move lower.”

Dollar-based investors will earn 9.33 percent by the end of 2014 on purchases of the rupee, the highest returns after Indonesia’s rupiah among Asian currencies, according to data compiled by Bloomberg. The forecasts are based on projections for the exchange rate and current deposit rates. Local bonds will gain in the period, lowering the 10-year sovereign yield to 8.40 percent, according to a Bloomberg survey of analysts.

India’s one-year interest-rate swap, a derivative contract used to guard against swings in funding costs, climbed 86 basis points this year, the most since 2010, to 8.48 percent, data compiled by Bloomberg show.

Three-month offshore non-deliverable forwards rose 0.2 percent today and 1 percent this month to 63.17 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.

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

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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