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Rupee Gains on Speculation Possible Fed Easing to Boost Inflows

India’s rupee gained on speculation Federal Reserve Chairman Ben S. Bernanke will today hint at further steps to boost U.S. growth, such as quantitative easing.

Bets for global stimulus mounted a day after the International Monetary Fund cut its 2013 world economic growth forecast to 3.9 percent from an April estimate of 4.1 percent. U.S. retail sales fell for a third month in June. State Bank of India, the nation’s largest lender, raised interest rates on certain rupee-deposits held by citizens living abroad.

“The rupee’s move is largely due to expectations that further easing measures in the U.S. could cause dollar weakness,” said Naveen Raghuvanshi, a trader at Development Credit Bank Ltd. in Mumbai. “The SBI interest-rate hike could lead to huge inflows, especially if global sentiment settles.”

The rupee advanced 0.4 percent to 55.1175 per dollar in Mumbai, according to data compiled by Bloomberg. The currency, which touched a record low of 57.3275 on June 22, has bottomed out and will strengthen to 54 in the coming days, according to Raghuvanshi. One-month implied volatility, a measure of exchange-rate swings used to price options, rose five basis points, or 0.05 percentage point, to 12 percent.

State Bank of India raised interest rates on certain types of deposits of below 1.5 million rupees ($27,305) for tenors of three years to five years, by 25 basis points to 9 percent, according to an exchange filing yesterday.

Inflation Threshold

The rupee’s gains will be limited by inflation, Alpari Financial Services India Ltd. said in an e-mailed note today. Wholesale prices unexpectedly eased to 7.25 percent in June from a year earlier, compared with 7.55 percent the previous month, official data show. That is still “way above the threshold” of around 5 percent, central bank Governor Duvvuri Subbarao said in Mumbai yesterday, referring to the monetary authority’s so-called comfort level. The Reserve Bank of India will next review borrowing costs on July 31.

“I’m not implying anything by way of what decision we might take at the policy review at the end of July,” Subbarao said. “I’m only saying that inflation is above the threshold.”

Three-month onshore rupee forwards traded at 56.10 per dollar, compared with 56.24 yesterday, and offshore non-deliverable contracts were at 55.97 from 56.07. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

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