Indian Rupee Drops Most in 2 Months as Fed Signals Rate Increase

India’s rupee fell the most in almost two months after the U.S. cut stimulus further and signaled interest rates will be raised, potentially damping fund flows into emerging markets.

The Federal Reserve reduced its bond-buying program by $10 billion yesterday to $55 billion. The purchases will finish by year-end with a borrowing-cost increase to follow in “around six months,” Chair Janet Yellen indicated yesterday. The rupee’s losses will probably be limited because its 12.2 percent rebound from a record low in August, the best performance among 24 developing-nation currencies, is helping attract overseas investors, according to FirstRand Ltd.

“If the Fed announcement had come six months ago the rupee’s drop would have been much steeper,” said Paresh Nayar, head of currency and money markets at FirstRand in Mumbai. “Sentiment has turned. The Fed statement was discounted to a large extent and we even saw some inflows today.”

The rupee weakened 0.6 percent to 61.3325 per dollar in Mumbai, the biggest drop since Jan. 27, according to prices from local banks compiled by Bloomberg.

The Federal Open Market Committee said yesterday it will no longer link borrowing costs to a specific unemployment rate, and will consider a broad range of indicators on the labor market, inflation and financial markets instead. Separately, the Fed released forecasts showing more officials predicting the benchmark rate, now close to zero, will rise at least to 1 percent at the end of 2015 and 2.25 percent by the end of the following year, higher than previously forecast.

Capital Inflows

The rupee declined less today than the currencies of Indonesia and Thailand. The rupiah slid 1.1 percent and the baht 1 percent. Global funds bought a net $1.6 billion of Indian stocks and $6.2 billion of rupee-denominated debt this year, exchange data show, as inflation eases and the government forecasts narrower deficits.

The current-account shortfall will be kept below $40 billion in the year through March 31, Finance Minister Palaniappan Chidambaram said in a March 7 briefing in New Delhi, compared with a record $88 billion in the previous 12 months. The budget gap will narrow to 4.6 percent of gross domestic product, the least since 2007-2008, from 4.9 percent, he estimated in February.

One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, rose 20 basis points, or 0.20 percentage point, today to 8.99 percent. The measure has dropped 121 basis points in 2014.

The rupee’s three-month offshore non-deliverable forwards fell 0.6 percent to 62.52 per dollar. 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 editors responsible for this story: James Regan at jregan19@bloomberg.net Anil Varma, Thomas Kutty Abraham

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