Rupee Drops Most in Two Weeks as Slower Growth May Damp Inflows

India’s rupee fell the most in two weeks on concern capital inflows will slow after a report showed Asia’s third-largest economy cooled.

Gross domestic product rose 4.7 percent in the three months ended Dec. 31 from a year earlier, following a 4.8 percent gain the previous quarter, government data showed after markets shut on Feb. 28. An official estimate for a 4.9 percent expansion in the year ending March 31, compared with a decade-low 4.5 percent in the prior 12 months, now appears “challenging,” according to Citigroup Inc. Ten-year bonds dropped, adding to last month’s biggest decline since November.

The rupee weakened 0.5 percent, the most since Feb. 18, to 62.0425 per dollar in Mumbai, prices from local banks compiled by Bloomberg show. It gained 1.5 percent last month. The yield on the 8.83 percent sovereign notes due November 2023 rose four basis points to 8.90 percent. It climbed nine basis points in February as Reserve Bank of India Governor Raghuram Rajan said inflation remains the biggest threat to the economy.

“Growth in the fourth quarter would need to rise by 5.7 percent to meet” the government’s annual estimate, Citigroup economists Rohini Malkani and Anurag Jha wrote in a note. “Interest rates are likely to remain higher for longer to contain inflation and elevated inflationary expectations.”

Rajan has raised borrowing costs three times since taking office in September. Consumer-price gains slowed to 8.79 percent in January from as much as 11.2 percent in November, the latest official figures show.

Fund Flows

The rupee climbed the most since October last month as global funds added $3 billion to holdings of local stocks and bonds in February, according to exchange data.

One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, slid 23 basis points, or 0.23 percentage point, today to 7.23 percent. Three-month offshore non-deliverable forwards fell 0.3 percent to 63.19 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.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, rose three basis points to 8.71 percent, data compiled by Bloomberg show.

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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