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Indian Rupee Drops Most in Two Months on U.S. Stimulus Concern

India’s rupee fell the most in two months as concern the Federal Reserve will scale back policies that boost the supply of dollars hurt demand for riskier assets.

Minutes of the Federal Reserve’s last meeting, released yesterday, showed policy makers expect to end their $85 billion monthly bond purchases in 2013. The rupee also weakened after data on Dec. 31 showed India’s current-account deficit widened to a record $22.3 billion in the quarter ended Sept. 30. Foreign funds poured almost $25 billion into Indian stocks last year.

“There could be fewer dollars available for investment in emerging-market equities, and this will hurt the rupee,” said Naveen Raghuvanshi, a trader at Development Credit Bank Ltd. in Mumbai. “Right now we are in risk-off trade.”

The rupee declined 1.1 percent today to 55.0750 per dollar in Mumbai, the biggest drop since Nov. 5, according to data compiled by Bloomberg. The currency, which weakened 3.5 percent last year after plunging 16 percent in 2011, lost 0.5 percent this week.

One-month implied volatility, a gauge of expected moves in exchange rates used to price options, rose 10 basis points today, or 0.10 percentage point, to 9.80 percent. The rate fell 20 basis points this week after a 190 basis point drop in 2012.

The Dollar Index, which tracks the greenback against six major trading partners, rose for a third day on speculation U.S. policy makers will struggle to reach an agreement on raising the nation’s debt limit.

Three-month onshore rupee forwards traded at 56.05 per dollar, compared with 55.52 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 56.01 versus 55.37. 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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