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Rupee Retreats From One-Week High on Europe Political Concerns

India’s rupee fell from a one-week high as investors sought the perceived safety of the dollar on concern Europe’s debt crisis will worsen.

The Dollar Index, which tracks the greenback against major trading partners, touched a six-month high yesterday as early results suggested Italy’s election would yield a hung parliament, leading to another vote. The rupee’s losses will be capped as Finance Minister Palaniappan Chidambaram is likely to announce steps to rein in the fiscal and current-account deficits when he presents the annual budget to Parliament on Feb. 28, according to Federal Bank Ltd.

“We are seeing largely safe-haven dollar strength,” said Ravi Ranjit, chief manager at Federal Bank in Mumbai. “The rupee is unlikely to see too much weakness before the budget.”

The currency declined 0.4 percent to 54.0950 per dollar in Mumbai, according to data compiled by Bloomberg. It touched 53.8650 yesterday, the strongest level since Feb. 15.

One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 10 basis points to 9.50 percent. The measure has dropped from 10.1 percent at the end of last year.

Railway Budget

Italy’s Democratic Party leader Pier Luigi Bersani, having campaigned to maintain austerity measures, won control of the lower house but not the Senate. Rival Silvio Berlusconi called for a recount.

Chidambaram has vowed to narrow the budget deficit to 4.8 percent of gross domestic product in the year beginning April 1, from 5.3 percent this year.

The government has cut subsidies on diesel to rein in spending and raised more than $4 billion in asset sales after Standard & Poor’s and Fitch Ratings cut their credit outlooks for India last year, citing its failure to cut budget and current-account deficits. Both companies rank the country at BBB-, the lowest investment grade.

Indian Railways, Asia’s oldest network, plans to link passengers fares and freight rates with fuel prices for the first time as it seeks to cut more than $4.5 billion of losses stemming from below-cost tariffs.

Charges for shipping commodities on the network will be linked to fuel prices starting April 1, Rail Minister Pawan Kumar Bansal said in parliament in New Delhi today while announcing the operator’s annual budget.

“The fuel-linked freight increase is a good move,” said Sonal Varma, an economist at Nomura Holdings Inc in Mumbai. “That will over time minimize their losses.”

Three-month onshore rupee forwards traded at 55.22 per dollar, compared with 54.99 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.14 versus 54.82. 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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