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India’s Rupee Weakens to One-Year Low on Fed Stimulus Outlook

June 7 (Bloomberg) -- India’s rupee declined past 57 per dollar for the first time in almost a year on concern the Federal Reserve will scale back debt purchases that have fueled fund flows to emerging markets. Government bonds fell.

The currency completed a fifth weekly drop after central bank governor Duvvuri Subbarao said today the balance of payments is under stress and retail inflation is still high. Fed Chairman Ben S. Bernanke said last month 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 improvement in the U.S. jobs market.

“The withdrawal of QE by the Fed might not mean an immediate withdrawal of funds from India but is more likely to lead to a stoppage of flows,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai. “The currency will remain weak, specifically as reliance of India on global flows continues to be strong due to the large current-account deficit.”

The rupee fell 1 percent this week to 57.0650 per dollar in Mumbai, according to data compiled by Bloomberg. The currency fell 0.4 percent today. It earlier touched 57.1250, 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 16 basis points, or 0.16 percentage point, this week to 9.07 percent.

The Fed is buying $85 billion of Treasury and mortgage bonds each month to keep borrowing costs low and spur the U.S. economy. Non-farm payrolls data due today may provide an indication of whether the purchases will be reduced.

Overseas investors bought $15.3 billion more local shares than they sold this year through June 5, helping ease pressure on the rupee from India’s record current-account deficit.

Slowing Inflation

The shortfall in the current account, the broadest measure of trade, was probably about 5 percent of gross domestic product in the fiscal year through March 2013, Reserve Bank of India Governor Duvvuri Subbarao said last month. India, the world’s largest gold buyer, increased import duties on the precious metal this week to 8 percent from 6 percent to rein in the gap.

Wholesale prices probably rose 4.86 percent in May, the least since 2009, according to a Bloomberg survey of economists before official data due June 14.

Deutsche Bank AG predicts the rupee will rally against the dollar due to declining inflation, lower import demand and rising real interest rates.

“Given these, we are not inclined to worry a great deal about the rupee’s near- or medium-term outlook,” Deutsche Bank economists Taimur Baig and Kaushik Das wrote in a research note today. “The economy’s outlook is weak however, and the currency will remain vulnerable to periodic policy setback and global factors.”

Bonds, Forwards

The yield on the 7.16 percent government bonds due May 2023 was little changed this week at 7.24 percent, according to the central bank’s trading system. The rate rose two basis points today.

Three-month onshore rupee forwards traded at 57.95 per dollar, compared with 57.42 on May 31, data compiled by Bloomberg show. Offshore non-deliverable contracts were at 58.11 versus 57.60. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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