India’s rupee had its biggest gain since 1986, rebounding from a record low, amid speculation a central bank plan to supply dollars to the largest oil buyers will cool demand for foreign exchange. Bonds and stocks rallied.
The Reserve Bank of India will provide foreign currency to state-owned Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp., which the authority will repurchase after a specified period, according to a statement on its website late yesterday. The rupee plunged the most in 20 years yesterday on concern a surge in oil prices amid political tension over Syria will worsen India’s current-account deficit and push the economy toward its biggest crisis since 1991.
“The RBI’s measure has brought relief to the markets but it should have come much earlier than now when policy makers have their backs to the wall,” K. Ramanathan, chief investment officer at ING Investment Management Pvt. in Mumbai, said by phone. “The Syria situation is the joker in the pack. If it gets resolved, the rupee should find more support.”
The rupee surged 3.4 percent to 66.5950 per dollar in Mumbai, the biggest gain since March 1986, according to prices from local banks compiled by Bloomberg. The currency plunged 3.9 percent, the most since March 1993, to an unprecedented 68.8450 yesterday. Today’s advance pares the rupee’s drop this year to 17.4 percent, still the worst performance in Asia.
The yield on the 7.16 percent government bonds due May 2023 fell 19 basis points, or 0.19 percentage point, to 8.77 percent, the biggest drop since Aug. 21. The S&P BSE Sensex of 30 companies jumped 2.3 percent to 18,401.04, rebounding from a fall to the lowest level since September 2012 yesterday.
The RBI’s plan to supply dollars directly to oil companies via foreign-exchange swaps may boost the rupee toward 65 per dollar, Priyanka Kishore, a strategist at Standard Chartered Plc in London, said in an e-mail yesterday. The three biggest state refiners buy about $300 million each day from the local spot market, she estimates. The central bank sold dollars to oil firms during the global financial crisis in 2008.
Costlier imports are pressuring on India’s balance of payments when the prospect of a cut in U.S. stimulus is fueling fund outflows. The current-account deficit widened to a record 4.8 percent of gross domestic product in the year ended March.
The possibility of military action by the U.S. and its allies against Syria, after they concluded the regime used chemical weapons against civilians, has fanned concern that political unrest in the region will disrupt Middle East oil supplies. A 7.6 percent jump in Brent crude this month is set to boost costs for Asia’s third-largest economy, which imports 80 percent of its oil needs.
Since July, Indian policy makers have curbed derivatives trading, restricted cash supply and asked foreign investors to prove they aren’t speculating on the rupee, in attempts to arrest the currency’s slide.
One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, fell 18 basis points to 22.1 percent today, after touching the highest level since January 2009 yesterday.
The RBI’s move “will help somewhat but it’s still too weak a signal and will not make me change my view on the rupee,” Benoit Anne, head of emerging-market strategy at Societe General SA in London, said in a telephone interview yesterday. “I continue to be concerned as we need to see a more heavy hand from the authorities in India.”
Three-month onshore rupee forwards rose 2.2 percent to 68.29 per dollar, data compiled by Bloomberg show, Offshore non-deliverable contracts advanced 1.9 percent to 69.08. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.