Indian Rupee Volatility Jumps Most Since August on Election Risk

A gauge of expected fluctuations in India’s rupee surged the most since August amid speculation the currency will pare this year’s gains should election results due in a month go against predictions.

The main opposition Bharatiya Janata Party is leading in opinion polls, as voters punish the ruling Congress party for corruption scandals and the slowest growth in a decade. A decisive victory for the BJP would be a “catalyst” for long-term rupee gains, while a weak coalition could fuel declines, Adam Gilmour, Citigroup Inc.’s head of Asia-Pacific currency and derivatives sales, said last month. The world’s biggest-ever election began on April 7 and results will be announced May 16.

“Volatility in the rupee has shot up because exactly one month from today, we have the election outcome,” saidAshtosh Raina, Mumbai-based head of foreign-exchange trading at HDFC Bank Ltd. “There are position adjustments happening ahead of election results.”

One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, climbed 193 basis points, or 1.93 percentage points, to 12.0450 percent in Mumbai, according to data compiled by Bloomberg. That’s the biggest increase since Aug. 28, when the spot rate tumbled to a record low of 68.845 per dollar.

The BJP and its allies may take 275 of 543 parliamentary seats up for grabs, three more than they need for a majority, according to a Hansa Research survey for the NDTV channel released April 14. Previous polls have shown the BJP and its partners winning the most seats while falling short of the 272 needed for a majority.

Accelerating Inflation

The rupee declined in the spot market on concern accelerating inflation will erode returns on the nation’s assets. The wholesale-price index rose 5.7 percent last month, after a 4.68 percent gain in February, while consumer-price gains quickened in March for the first time in four months to 8.31 percent from a revised 8.03 percent in February, official figures released yesterday showed.

“Inflation has been on the higher side, impacting the rupee negatively,” said Vikas Babu, a Mumbai-based trader at Andhra Bank, adding “persistent dollar demand from oil companies,” also weighed on the currency.

The rupee weakened 0.3 percent to 60.39 per dollar, according to prices from local banks compiled by Bloomberg. It strengthened 2.3 percent so far in 2014, the best performance after Indonesia’s rupiah among the 11 most-traded currencies in Asia outside Japan.

Three-month offshore non-deliverable forwards on the rupee were little changed at 61.51 per dollar, according to data compiled by Bloomberg. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in the greenback.

To contact the reporter on this story: Divya Patil in Mumbai at dpatil7@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net Anil Varma, Sam Nagarajan

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