Rupee Rises From 11-Month Low on Optimism Fed Will Keep Stimulus

India’s rupee rose from an 11-month low after data showing an unexpected drop in U.S. manufacturing tempered concern the Federal Reserve will reduce asset purchases that have spurred fund flows into emerging markets.

The Dollar Index, which tracks the greenback against six major counterparts, fell the most since January yesterday as a factory index for the world’s largest economy declined to 49, the lowest level since June 2009. A reading below 50 indicates contraction. The rupee advanced the most since April 30 after the central bank tightened rules for gold imports that contributed to a record current-account deficit.

“The market sees what it wants to see, clinging on to the idea and hope that weak data may lead to a possible delay of quantitative easing tapering,” Wee-Khoon Chong, a strategist at Societe Generale SA in Hong Kong, wrote in a research note today. India will need “drastic” steps to curb gold imports and shield the rupee against the current-account gap, he wrote.

The rupee appreciated 0.6 percent to 56.4525 per dollar in Mumbai, according to data compiled by Bloomberg. It touched 56.8250 yesterday, the weakest level since June 28, 2012. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell 17 basis points, or 0.17 percentage point, to 8.96 percent.

The Reserve Bank of India doesn’t seek any particular exchange rate for the rupee, Governor Duvvuri Subbarao told the Press Trust of India yesterday. The central bank probably sold dollars around 56.75 last week to curb the local currency’s drop, according to J. Moses Harding, executive vice president at IndusInd Bank in Mumbai.

Fed Stimulus

Atlanta Fed President Dennis Lockhart said yesterday U.S. policy makers are committed to record stimulus measures. The Fed is buying $85 billion of Treasury and mortgage bonds each month to keep borrowing costs low and spur the economy.

The RBI today said in a statement that gold imports on consignment basis by nominated agencies and banks will now be allowed only to meet needs of exporters of gold jewelry. It also tightened financing rules for bullion imports.

Three-month onshore rupee forwards traded at 57.31 per dollar, compared with 57.61 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 57.32 versus 57.72. 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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