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Rupee Volatility Surges as U.S. Stimulus Bets Counter RBI Steps

Volatility in India’s rupee rose the most in more than two weeks as the central bank’s steps to tighten cash supply and arrest a slide in the currency were countered by concern the U.S. will pare stimulus.

The currency fluctuated between gains and losses in the spot market today before ending little changed. The Reserve Bank of India restricted banks’ access to funds late on July 23. A report yesterday showed sales of new U.S. homes increased to the highest level in five years in June, potentially bolstering the case for the Federal Reserve to cut stimulus that has driven demand for emerging-market assets.

“Recent measures announced by the RBI to curb liquidity and stabilize the rupee” are supporting the currency, L. Subramanian, an analyst at ICICI Bank Ltd. in Mumbai, wrote in a report today. Increased speculation the Fed will taper had weighed on the rupee, he wrote.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 52 basis points, or 0.52 percentage point, to 11.75 percent, according to data compiled by Bloomberg. That’s the biggest jump since July 8, when the rupee plunged to a record 61.2125 per dollar in the spot market. The currency ended little changed from yesterday at 59.11 in Mumbai, after earlier rising to 58.7700, the strongest level since June 19, according to prices from local banks compiled by Bloomberg.

Global funds have cut holdings of Indian debt by $8.8 billion since May 22, when the Fed first signaled it could curb asset purchases this year should economic risks subside. Data today will show claims for jobless benefits in the U.S. fell, the median estimate in a Bloomberg survey shows. The Fed will start trimming its $85 billion in monthly bond buying, known as quantitative easing, in September, according to 50 percent of economists surveyed by Bloomberg News between July 18 and 22.

RBI Steps

The RBI capped the amount lenders can borrow in daily repurchase auctions at 0.5 percent of their deposits, it said in a July 23 statement. The authority also raised the daily balance requirement for lenders’ cash-reserve ratios to 99 percent from 70 percent effective July 27.

The moves follow steps announced July 15, when the RBI raised two interest rates and drained money through bond sales. The central bank kept its main repurchase rate at 7.25 percent as the economy grows at the slowest pace in a decade.

Forwards Rise

“As money-market liquidity tightens, the cost of carrying a speculative position in anticipation of further rupee weakness increases significantly,” economists at Barclays Plc, including Siddhartha Sanyal in Mumbai, wrote in a research report yesterday. “While the current moves should push short-term interest rates higher and make foreign-exchange speculation costlier, we don’t think that such speculation is the key driver of current rupee weakness. Accordingly, we do not gain much confidence that these measures will effectively curb pressures on the rupee.”

Three-month onshore rupee forwards were little changed at 60.60 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts were steady at 60.40. 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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