Rupee Surges to One-Month High After Fed; Bonds Rally

India’s rupee surged to the highest level in more than a month after the U.S. Federal Reserve unexpectedly refrained from cutting stimulus that has buoyed emerging-market assets. Bonds and stocks rallied.

The Federal Open Market Committee said yesterday it wants to see more evidence of a recovery in the world’s largest economy before tapering monthly bond purchases of $85 billion. Economists surveyed by Bloomberg had forecast a reduction of $5 billion. The FOMC is concerned the rapid tightening of financial conditions in recent months could damp growth, Fed Chairman Ben S. Bernanke said at a press conference in Washington.

“The surprising Fed decision is naturally supportive of risk appetite in emerging markets” and “the effect on the current account-deficit countries could be larger,” Koon Chow, head of emerging-market strategy at Barclays Plc in London, wrote in an e-mailed note. “As their currencies rally, some of the priced-in expectations of aggressive monetary tightening may be unwound as well, with local bonds enjoying a lift.”

The rupee climbed 2.6 percent to 61.7750 per dollar in Mumbai, the strongest level since Aug. 16, according to prices from local banks compiled by Bloomberg. It rose as high as 61.6450 intraday.

The yield on the 7.16 percent Indian sovereign notes due May 2023 slumped 18 basis points, or 0.18 percentage point, to 8.19 percent, according to the central bank’s trading system. That’s the lowest level since Aug. 8. The 30-stock S&P BSE Sensex of local shares soared 3.4 percent to 20,646.64, its highest close since November 2010, with lenders leading the advance.

Fed Outlook

The Fed left unchanged its outlook that its target interest rate will remain near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent, according to a statement. The U.S. will release jobless claims and existing home sales reports later today.

Overseas funds have reduced holdings of Indian debt by more than $10 billion since May 22, when Bernanke first flagged a potential paring of asset purchases.

The Reserve Bank of India will review policy tomorrow after government data this week showed wholesale-price inflation unexpectedly rose to a six-month high of 6.1 percent in August. Governor Raghuram Rajan will leave the benchmark repurchase rate unchanged at 7.25 percent, according to all 36 economists surveyed by Bloomberg.

‘Breathing Space’

“There is likely to be some positive outcome for the rupee” from the Fed’s decision, which “provides some breathing space for domestic policy makers to address the key issues of current-account deficit and fiscal,” Kotak Mahindra Bank Ltd. economists including Madhavi Arora wrote in a note. “The RBI will likely use the space provided to strengthen its forex position and keep the lid on the depreciation pressure by maintaining status quo on interest rates.”

One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, slumped 192 basis points to 17.73 percent, the most since Sept. 10, data compiled by Bloomberg show. The rate surged 214 basis points in the past two days, the biggest such advance since Aug. 28, when the currency sank to a record 68.845 to a dollar.

Three-month onshore rupee forwards jumped 2.2 percent to 63.43 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts climbed 2.6 percent to 63.52. 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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