India’s rupee completed a third weekly decline after the Federal Reserve indicated it may slow debt purchases, fueling concern that fund flows to emerging markets will reduce. Bonds gained for an eighth week.
Fed Chairman Ben S. Bernanke said on May 22 that the central bank may cut the pace of bond purchases, known as quantitative easing, in the next few meetings if policy makers see indications of sustained economic growth. Foreign investors have bought $14.6 billion more of Indian shares than they have sold this year, an increase of 70 percent from a year earlier, helping meet dollar demand as a record current-account deficit pressures the currency.
“Concerns that inflows will be affected if the Fed reduces stimulus are keeping the rupee subdued,” said Paresh Nayar, head of money markets and currency at FirstRand Ltd. in Mumbai. “India needs sustained capital flows to offset the shortfall in the current account.”
The rupee weakened 1.4 percent this week and 0.1 percent today to 55.6450 per dollar in Mumbai, according to data compiled by Bloomberg. It touched 56.0145 yesterday, the lowest level since Sept. 6.
One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 55 basis points, or 0.55 percentage point, this week to 9.0225 percent.
India’s current account deficit reached a record $32.5 billion in the three months through December, official data show.
Three-month onshore rupee forwards traded at 56.52 per dollar, compared with 55.79 at the end of last week, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 56.57 versus 55.94. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
India’s wholesale price index climbed 4.89 percent in April from a year earlier, the least since November 2009, official data showed last week, spurring speculation of further central bank rate cuts. The Reserve Bank of India has reduced the repurchase rate by 75 basis points this year to 7.25 percent.
The yield on the 8.15 percent government bonds June 2022 dropped seven basis points this week to 7.34 percent in Mumbai. The rate fell six basis points today.
The five-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose one basis point this week to 6.77 percent, according to data compiled by Bloomberg.
“The fundamentals are for lower bond yields and swap rates amidst sluggish growth momentum and easing inflation of late,” Citigroup analysts including Singapore-based Gaurav Garg wrote in a research note. “We recommend being long rupee bonds and receiving five-year swaps.”