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India’s Rupee Drops Most in Three Weeks as Inflation Accelerates

India’s rupee dropped the most in more than three weeks after a report showed inflation quickened to a seven-month high in September, reducing room for the central bank to spur slowing economic growth.

Wholesale prices rose 6.46 percent from a year earlier, official data showed today. That’s more than the 6 percent median estimate in a Bloomberg survey and above August’s 6.1-percent increase. Industrial production climbed 0.6 percent in August, slowing from July’s 2.8 percent, a government report issued after the market shut on Oct. 11 showed. The median estimate in a Bloomberg survey was for a 2 percent gain.

“The pickup in inflation is testament to the lingering inflation risks and underscores need for the Reserve Bank of India to keep its guard up,” Leif Eskesen, an economist at HSBC Holdings Plc in Singapore, wrote in a note today. “There is, consequently, a good chance that the RBI will deliver another repo-rate hike at the October monetary policy meeting.”

The rupee fell 0.8 percent to 61.5450 per dollar in Mumbai, the most since Sept. 20, according to prices from local banks compiled by Bloomberg. The currency has rebounded almost 12 percent from a record low of 68.845 touched Aug. 28.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 12 basis points, or 0.12 percentage point, to 14.87 percent. The rate has fallen from a five-year high of 22.4 percent on Sept. 4.

Rate Decision

RBI Governor Raghuram Rajan unexpectedly raised the key repo rate by 25 basis points on Sept. 20, the first increase since 2011, to curb the fastest consumer-price increases among the four largest emerging markets. He also cut the marginal standing facility rate to 9.5 percent from 10.25 percent the same day as part of steps to ease cash supply.

Last week, Rajan cut the MSF rate further to 9 percent. The RBI, which next reviews policy on Oct. 29, also bought bonds through open-market purchases, raising cash supply.

“To the extent rupee stability is sustained, the RBI will also likely further roll back the currency stabilization measures, possibly cutting the MSF rate by another 25 basis points and adding liquidity,” Eskesen wrote.

U.S. Senate leaders have yet to reach an agreement on how to end the fiscal impasse pertaining to raising the debt ceiling three days before the government’s borrowing authority lapses.

One-month onshore rupee forwards fell 0.5 percent to 61.94 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts declined 0.8 percent to 61.98. 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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