India’s rupee, which slumped to a record low last week, has been “relatively stable” following steps announced by the central bank, Deputy Governor Subir Gokarn said, promising “more measures as the need arises.”
The Reserve Bank of India said Dec. 15 that companies can’t enter into multiple forward contracts to cover a single overseas transaction. The monetary authority allowed microfinance companies to raise as much as $10 million from abroad on Dec. 19. It also eased rules in November for companies to borrow offshore and sell foreign currencies through swaps, while offering higher deposit rates for Indians living outside the country.
“These are not the only measures we have,” Gokarn told reporters in Mumbai yesterday. “There are other measures we can undertake to bring stability to this market. But for the moment, clearly some degree of stability has returned, and that’s important.”
The rupee rose 0.4 percent to 52.6813 per dollar as of 12:46 p.m. in Mumbai, the first gain in three days. That pared the year’s loss to 15 percent, still Asia’s worst performer, as concerns the European debt crisis will deepen prompted overseas funds to sell emerging-market assets. The currency also fell on signs economic growth is slowing and the government may miss its target of narrowing its budget deficit to a four-year low of 4.6 percent of gross domestic product in the 12 months to March 31.
Policy makers in India are favoring easing capital controls to boost the supply of dollars rather than outright intervention, which Gokarn said on Nov. 22 isn’t “an easy judgment.” Foreign currency reserves dropped $14 billion in the four weeks to Nov. 25, indicating the Reserve Bank sold dollars to stem the rupee’s slide. Gokarn said the same month that the operation was meant to “smooth volatility.”
Central banks sell and buy foreign exchange to manage the value of their local currencies. A decline helps exporters as it makes their products cheaper in markets abroad, while an appreciation makes imports less expensive.
Implied volatility on one-month dollar-rupee options, a gauge of expected exchange-rate swings, rose 160 basis points this month to 13.5 percent, after touching a 19-month high of 14.3 percent on Dec. 16, data compiled by Bloomberg show. The rupee ended little changed yesterday at 52.89 a dollar. It plunged to a record low of 54.305 on Dec. 15.
The slump isn’t a sign of “helplessness in dealing with the kind of global turbulence we are seeing,” Gokarn said on Dec. 3 in Mumbai.
India plans to ease restrictions on overseas borrowings and allow companies to raise dollar loans at higher costs, two government officials with direct knowledge of the matter said Dec. 19.
Borrowers can raise funds at an all-in cost of as much as 900 basis points above the London interbank offered rate for foreign-currency debt, compared with an earlier cap of 500 basis points, the people said, asking not to be identified as they aren’t authorized to speak on the subject.
Companies that are now allowed to borrow $20 million in a single financial year with a minimum three-year maturity can raise as much as $100 million under the new rules, according to the officials.
Traders overseas are betting the rupee will weaken further. Offshore forwards indicate it will trade at 54.31 to the dollar in three months, compared with expectations for a rate of 54.06 on Dec. 19. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
“The RBI can take more steps and until they do so or the European crisis is resolved, the rupee will maintain a depreciating bias,” said Ashtosh Raina, head of currency trading at HDFC Bank Ltd. in Mumbai. “I wouldn’t say that volatility has significantly fallen. In fact, the market has become more illiquid, so moves are more exaggerated.”
Advance tax payments for the current quarter may have resulted in an outflow of 690 billion rupees ($13 billion) from the banking system, and a resulting shortfall in the money markets may be temporary, Gokarn said yesterday.
“Things will normalize over the next few days,” he said.
The Reserve Bank of India last week refrained from raising interest rates for the first time in eight meetings after inflation slowed to a one-year low and industrial output shrank for the first time in 28 months. Gokarn declined to say when the RBI will start cutting borrowing costs.