July 15 (Bloomberg) -- India’s rupee dropped the most in a week as a report showed inflation accelerated, limiting the central bank’s scope to ease monetary policy.
Wholesale prices rose 4.86 percent in June from a year earlier, compared with a 4.7 percent increase in May, official data showed today. Price-increases had slowed in the four months through May. Consumer price-inflation quickened to 9.87 percent last month from 9.31 percent, while industrial output unexpectedly contracted in May, official figures showed July 12. The rupee will weaken in the coming months as the U.S. will pare stimulus this year, according to Emirates NBD PJSC.
The dollar-rupee exchange rate is “likely to remain underpinned in the short term in line with other emerging-market currencies,” Tim Fox, chief economist at Emirates NBD in Dubai, wrote in a research report today. The increase in the inflation rate is ’’something that the authorities may be sensitive to while the rupee weakness remains.’’
The rupee declined 0.4 percent to 59.8950 per dollar in Mumbai, the biggest drop since July 8, according to prices from local banks compiled by Bloomberg. The currency, which fell to a record 61.2125 on July 8, will sink to 62 in a month, Fox predicts. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose five basis points, or 0.05 percentage point, to 12.53 percent.
The Federal Reserve still intends to start reducing asset purchases, which debased the dollar and contributed to emerging-market inflows, in the final quarter of 2013 and possibly as early as September as the world’s largest economy recovers, Fox wrote. Chairman Ben S. Bernanke said last week the U.S. would need accommodative monetary policy for the foreseeable future.
India is considering selling sovereign bonds overseas for the first time as policy makers weigh measures to stem the rupee’s slide, two officials with direct knowledge of the matter said last week, asking not to be named as the information is confidential.
The sale is a possible supporting factor for the rupee, Vishnu Varathan, a senior economist at Mizuho Bank Ltd. in Singapore, said in a July 12 interview.
India’s trade deficit narrowed to $12.2 billion in June from $20.1 billion in May as gold and silver imports fell to $2.45 billion from $8.39 billion, official data showed July 12.
Three-month onshore rupee forwards fell 0.2 percent from July 12 to 60.96 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts were little changed at 61.03. 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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