India’s rupee completed a sixth weekly drop, the longest losing run in a year, on speculation U.S. policy makers will scale back asset purchases that have boosted flows to emerging markets. Government bonds fell on concern a weaker currency will spur inflation.
The rupee and sovereign notes advanced today after official data showed wholesale prices rose 4.7 percent in May from a year earlier, compared with a median forecast of 4.88 percent in a Bloomberg survey. The rupee slid to a record on June 11, before rising by the most since January the following day as Fitch Ratings upgraded India’s credit-rating outlook to stable from negative and policy makers took steps to boost the supply of dollars.
“The data is encouraging,” said Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong. “At the same time, the much-weaker currency will keep the RBI on hold at the June 17 meeting. The central bank will cut interest rates in the coming quarters, just not now.”
The rupee fell 0.8 percent this week to 57.53 per dollar in Mumbai, according to data compiled by Bloomberg. It touched an all-time low of 58.985 on June 11 and has risen 0.8 percent today. Seven of the 11 most-active Asian currencies have weakened against the greenback since June 7.
The yield on the benchmark 8.15 percent government bonds due June 2022 rose 13 basis points, or 0.13 percentage point, this week to 7.53 percent, according to the central bank’s trading system. It declined two basis points today.
The Reserve Bank of India will keep its benchmark repurchase rate at 7.25 percent at a June 17 review, according to 15 of 25 economists in a Bloomberg survey. Ten predict a 25 basis point cut.
Federal Reserve Chairman Ben S. Bernanke said May 22 the monetary authority could scale back stimulus should U.S. employment show “sustainable improvement.” The $85 billion of bond purchases each month debases the dollar and contributes to inflows to emerging markets. The Federal Open Market Committee meets next week.
Finance Minister Palaniappan Chidambaram signaled yesterday foreign investment caps will be eased further and said steps are being taken to curb rupee swings. Policy makers are weighing measures including a bond sale to Indians living abroad to lure investment and offset a record current-account deficit, Raghuram Rajan, the top adviser at the finance ministry, told reporters on June 11.
Long-term investors, including sovereign-wealth funds, multilateral agencies and foreign central banks, can buy $5 billion more Indian sovereign debt, the central bank said in a June 12 statement. The cap on overseas ownership of government notes is now $30 billion, compared with $25 billion earlier. Global funds have sold more rupee debt than they bought each day since holdings reached a record $38.5 billion on May 21.
The RBI sold dollars on June 11 and 12 to slow the rupee’s slide, said two people with knowledge of the matter who asked not to be named because the information isn’t public. One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, rose 192 basis points this week to 10.95 percent.
Three-month onshore rupee forwards fell 0.8 percent from a week ago to 58.42 per dollar, according to data compiled by Bloomberg. Offshore non-deliverable contracts dropped 0.3 percent to 58.41. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.