India’s rupee completed its worst month in a year on concern any reduction in bond-buying by the Federal Reserve will curb dollar supply, leaving the Asian currency vulnerable to a record current-account deficit.
The balance of payments is under stress, Reserve Bank of India Governor Duvvuri Subbarao said in Ahmedabad yesterday, adding that it is a challenge to attract stable capital flows. Fed Chairman Ben S. Bernanke said last week the central bank may cut the pace of debt purchases if there are signs of sustained improvement in the U.S. economy. India’s gross domestic product increased 4.8 percent in the first three months of the year, the second quarter of below 5 percent growth, data showed today.
“Market sentiment is firmly on Fed tapering and positive economic momentum” in the U.S., Wee-Khoon Chong, a strategist at Societe Generale SA in Hong Kong, wrote in an e-mail today. “India’s current-account deficit remains a big issue.”
The rupee weakened 4.8 percent this month to 56.5050 per dollar in Mumbai, the biggest loss since May 2012, according to data compiled by Bloomberg. The currency dropped 0.2 percent today, touching the weakest level since June 28, 2012, and fell 1.5 percent this week. The Dollar Index, which tracks the greenback against six major trading partners, rose 1.8 percent this month.
The central bank may have sold dollars around 56.75 to curb the rupee’s drop, according to J. Moses Harding, executive vice president at IndusInd Bank Ltd. in Mumbai. This should encourage exporters to convert overseas earnings, he said.
One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, rose 95 basis points, or 0.95 percentage point, this month to 9.26 percent.
The shortfall in the current account, the broadest measure of trade, probably widened to a record of around 5 percent of GDP in the year ended March, Governor Subbarao said yesterday.
Global funds have been net sellers of rupee-denominated debt each day since holdings touched a record $38.5 billion on May 21, exchange data show, while they have bought $14.9 billion more of Indian stocks than they sold this year. Asia’s third-largest economy should be prepared for the probability of outflows in 2014 as developed economies consider withdrawing stimulus measure, Governor Subbarao said this month.
The surge that propelled the Dollar Index to its highest level since 2010 is masking the greenback’s 30-year low versus emerging-market currencies. India’s real-effective exchange rate, which tracks the rupee against the currencies of six major trading partners, was 106.29 in April, RBI data show. A number above 100 shows appreciation.
“So do be careful in talking about currency weakness just against one cross rate, which is the U.S. dollar,” Adrian Mowat, chief Asian and emerging-market strategist at JPMorgan Chase & Co., told Bloomberg TV India yesterday. “We have entered a strong dollar environment that tends to be a difficult environment for emerging-market currencies.”
Three-month onshore rupee forwards traded at 57.42 per dollar, compared with 54.84 on April 30, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 57.56 versus 54.54 a month ago. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.