Rupee Completes Worst Week Since August on Fed, Growth Concerns

India’s rupee completed its worst week since August on concern regional economic weakness and the prospect of further U.S. stimulus cuts will spur fund outflows.

The Federal Reserve, which is cutting its monthly bond purchases by $10 billion to $75 billion starting January, may consider more reductions, Richmond Fed President Jeffrey Lacker said Jan. 17. China’s manufacturing probably contracted and India’s factory output declined, reports in the past two weeks showed. The rupee fell the most in 11 weeks today as corporate dollar demand rose and as a drop in stocks fueled concern about capital outflows, according to Development Credit Bank Ltd.

Emerging markets are under pressure on concern the Fed will taper,” Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Singapore, said in a phone interview. “The rupee is weakening because of the spillover effect of emerging-market assets.”

The rupee fell 1.8 percent this past week to 62.6850 per dollar in Mumbai, according to data compiled by Bloomberg. That’s the biggest five-day drop since Aug. 30. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, advanced 12 basis points since Jan. 17 and rose 62 basis points today to 8.66 percent.

The Fed, which will review policy on Jan. 28-29, may reduce stimulus in $10 billion increments at each meeting before ending the program this year, according to a Jan. 10 Bloomberg News survey. Existing home sales in the U.S. capped the best year since 2006 in December and jobless claims were near a six-week low, according to the most recent data, bolstering the case for the Fed to scale back its debt buying.

Stocks Fall

The rupee fell 1.2 percent today, the most since Nov. 11, as the S&P BSE Sensex of local equities dropped 1.1 percent.

“There was strong demand for dollars from a corporate and capital outflows from the equity market also pressured the rupee downward,” said Naveen Raghuvanshi, a currency trader at Development Credit Bank Ltd. in Mumbai.

India’s industrial production unexpectedly dropped 2.1 percent in November from a year earlier, according to a report on Jan. 10. In China, the preliminary reading of 49.6 for January in a Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics was below a final figure of 50.5 in December. A number below 50 indicates contraction.

India’s Finance Minister Palaniappan Chidambaram said the central bank must keep the target of supporting growth in Asia’s third-biggest economy after a Reserve Bank of India panel recommended making inflation the “predominant objective” of monetary policy.

Inflation Target

The RBI committee proposed adopting a 4 percent target for consumer-price gains with a band of plus or minus two percentage points by 2016, a figure Chidambaram called “ambitious.” Consumer prices rose 9.87 percent in December from a year earlier, the fastest pace in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

The RBI will hold the repurchase rate at 7.75 percent at a Jan. 28 review, according to 35 of 38 economists in a Bloomberg survey. The others predict an increase to 8 percent.

Three-month offshore non-deliverable forwards in the rupee declined 1.3 percent today to 63.97 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: Divya Patil in Mumbai at dpatil7@bloomberg.net

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

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