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Rupee Rebounds From 1-Week Low as RBI Cuts Rates, Reserve Ratio

India’s rupee rebounded from the lowest level in more than a week after the central bank cut borrowing costs and the amount of deposits lenders must set aside as reserves.

The Reserve Bank of India lowered its benchmark repurchase rate to 7.75 percent from 8 percent, as predicted by 30 of 35 analysts in a Bloomberg News survey, and cut the cash reserve ratio to 4 percent from 4.25 percent. The authority lowered its inflation forecast and said price gains are likely to remain around current levels, allowing some room for monetary policy to boost economic growth.

The rupee advanced 0.3 percent to 53.7750 per dollar in Mumbai, according to data compiled by Bloomberg. It touched 53.96 earlier, the weakest level since Jan. 18. One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, fell 20 basis points, or 0.20 percentage point, to 9.80 percent.

The RBI is providing “more support to the economy than markets anticipated,” Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong, wrote in an e-mail. “This should boost the rupee.”

The Reserve Bank lowered its economic growth forecast for the year through March 31 to 5.5 percent from 5.8 percent and cut the inflation projection to 6.8 percent from 7.5 percent. Benchmark wholesale prices rose 7.18 percent in December from a year earlier, official data show.

“There is an increasing likelihood of inflation remaining range-bound around current levels going into 2013-14,” the central bank said. “This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks.”

Three-month onshore rupee forwards traded at 54.74 per dollar, compared with 54.90 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 54.57 versus 54.78. 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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