India’s Rupee Declines After RBI Keeps Interest Rates Unchanged

India’s rupee dropped, erasing a monthly gain, after the central bank kept interest rates unchanged and raised its inflation estimate.

The Reserve Bank of India increased its forecast for the pace of price gains in the year through March 2013 to 7 percent from 6.5 percent, as it kept the benchmark repurchase rate at 8 percent, according to a statement in Mumbai today. The decision to hold borrowing costs was predicted by 31 of 34 analysts in a Bloomberg News survey. Three expected a reduction to 7.75 percent. India’s current-account and budget deficits pose risks to the economy, the monetary authority said.

“The Reserve Bank highlighted India’s challenges without offering a clear path to overcoming them,” Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB, wrote in a report after the announcement. “Such talk is negative for the rupee.”

India’s currency declined 0.1 percent to 55.6575 per dollar in Mumbai, according to data compiled by Bloomberg. This compares with 55.6375 at the end of June. One-month implied volatility, a measure of exchange-rate swings used to price options, was unchanged at 11.20 percent today, having fallen 45 basis points, or 0.45 percentage point, this month.

The central bank also lowered its estimate for India’s economic growth this fiscal year to 6.5 percent from 7.3 percent, and said it is ready to respond to any shocks arising from the “turbulent global environment.”

In a separate statement, the Reserve Bank said exporters can retain all of their earnings in foreign currency. However, after adjusting for approved purposes or forward commitments, the rest of the amount must be converted into rupees before the last day of the succeeding month. This reverses the RBI’s May 10 decision to compel exporters to convert at least half of their non-rupee earnings.

Stimulus Optimism

The rupee gained earlier on speculation policy makers worldwide will boost efforts to arrest a global slowdown, according to Edelweiss Financial Advisors Ltd. The Federal Reserve and the European Central Bank meet this week and will probably keep borrowing costs at 0.25 percent and 0.75 percent, respectively, according to Bloomberg surveys.

The shortfall in India’s current account, the broadest measure of trade, widened to a record 4.2 percent of gross domestic product in the year through March 2012 from 2.7 percent the previous 12 months, official data show. The RBI yesterday said the government may miss its goal of cutting the budget deficit to 5.1 percent of GDP by March 2013 from 5.8 percent in the last fiscal year.

Three-month onshore rupee forwards traded at 56.60 per dollar, compared with 56.41 yesterday, and offshore non-deliverable contracts were at 56.53 from 56.36. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE