India’s rupee plunged to a record on concern the U.S. will pare stimulus as early as next month, intensifying outflows and leaving the currency vulnerable to a current-account deficit.
The rupee weakened 1.3 percent to 64.0450 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It touched an all-time low of 64.55 earlier. The currency’s slump caused the benchmark stock index to erase gains of as much as 1.8 percent. The Sensex dropped 1.9 percent to 17,905.91, the lowest close since Sept. 11. Benchmark 10-year bonds rallied, pushing the yield down by the most in four years.
The Federal Open Market Committee publishes minutes of its July meeting today, with 65 percent of economists surveyed by Bloomberg News predicting the Fed will taper bond purchases in September. The rupee had briefly strengthened 0.2 percent earlier after India’s central bank said late yesterday it will start buying government debt to pump funds into markets and consider reducing weekly sales of cash-management bills to rein in a surge in bond yields that threatened the economy.
“We remain bearish on the rupee on concerns of lower growth, Fed-tapering fears and weakening sentiment given general elections next year,” Amit Agrawal, an analyst at Societe Generale SA in Bangalore, wrote in a research report today. The bank predicts the currency will fall to 66.25 per dollar by the end of this year.
Global funds have cut holdings of Indian debt by $10 billion since May 22, when Fed Chairman Ben S. Bernanke first flagged the potential tapering. The shortfall in India’s current-account widened to a record 4.8 percent of gross domestic product in the year ended March 31.
The rupee’s slump also pared today’s bond rally. The yield on the benchmark 10-year bond ended at 8.42 percent after falling as low as 8.30 percent.
One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, rose 65 basis points, or 0.65 percentage point, to 15.59 percent.
The RBI will buy 80 billion rupees ($1.2 billion) of bonds through open-market operations on Aug. 23 and “thereafter calibrate them both in terms of quantum and frequency” based on market conditions, it said in a statement yesterday. Sales of cash-management bills will be calibrated going forward, “including scaling it down as may be necessary,” the monetary authority said.
Last month, the RBI increased both the marginal standing facility rate and the bank rate by 200 basis points to 10.25 percent. It tightened banks’ daily cash-reserve requirements and drained money through securities offerings. The central bank also cut its growth forecast for the year through March 2014 to 5.5 percent from 5.7 percent.
Three-month onshore rupee forwards fell 1.1 percent to 65.85 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts dropped 1.4 percent to 66.24. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.