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India Rupee Weakens on Concern Slowing Economy Will Deter Inflow

India’s rupee fell the most in a week on concern slowing economic growth will make it tougher to attract investment as the U.S. prepares to rein in stimulus.

Gross domestic product in Asia’s No. 3 economy probably rose 4.6 percent in the three months through June 30, less than the 4.8 percent expansion in the prior quarter, according to the median of 28 economists in a Bloomberg survey before data due Aug. 30. Minutes of the Federal Reserve’s July meeting released Aug. 21 showed policy makers were “broadly comfortable” with reducing bond-buying, known as quantitative easing, this year should the U.S. economy improve.

“The rupee’s losses are part a reflection of broad emerging-market vulnerability to the Fed unwinding its QE, and part a product of local structural and cyclical problems,” Tim Fox, chief economist at Emirates NBD in Dubai, wrote in a research report today. With “Indian GDP data expected to remain weak,” the rupee will stay under pressure, he wrote.

The rupee weakened 1.5 percent to 64.3075 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. The currency surged 2.1 percent on Aug. 23, its biggest gain since June 2012, after touching an all-time low of 65.56 a day earlier. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 31 basis points, or 0.31 percentage point, to 16.17 percent.

Global funds cut holdings of Indian debt by $9.8 billion since May 22, when the Fed first flagged the possible paring of stimulus. The outflows leave the rupee vulnerable to a current-account deficit that official data shows widened to an unprecedented 4.8 percent of GDP in the year ended March 31.

Three-month onshore rupee forwards fell 0.7 percent to 65.96 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts dropped 0.6 percent to 66.25. 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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