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Rupee Drops a Second Day as RBI Says Limited Room for Stimulus

India’s rupee weakened for a second day after the central bank said policy makers have limited room to stimulate economic growth.

Inflation, which slowed to a three-year low of 7.18 percent in December, is still “quite high,” Governor Duvvuri Subbarao told management students yesterday in Lucknow, in the northern state of Uttar Pradesh. The shortfall in India’s current account, the broadest measure of trade, widened to a record $22 billion in the quarter ended September, official data showed on Dec. 31. Asia’s third-largest economy has the widest budget deficit among the world’s biggest emerging nations.

“The backdrop for the rupee is likely to remain challenging,” analysts at HSBC Holdings Plc, including Hong Kong-based Paul Mackel, wrote in a report today. “This is due to two reasons: the ongoing widening of its twin deficits, particularly the current-account deficit, and the difficulty for the government to tackle these issues ahead of a number of state elections this year.”

The rupee declined 0.1 percent to 54.695 per dollar in Mumbai, according to data compiled by Bloomberg. One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, fell 5 basis points to 9.75 percent.

The macroeconomic condition in India is a cause for concern and the nation will be lucky if gross domestic product expands 5.5 percent in the year ending March, Subbarao said. The BSE India Sensitive Index of shares rose through 20,000 yesterday for the first time since January 2011, on speculation the Reserve Bank of India will reduce interest rates this month and the government will continue efforts to boost growth.

Three-month onshore rupee forwards traded at 55.79 per dollar, compared with 55.60 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.68 versus 55.44. 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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