India’s rupee fell for a second day on speculation faster inflation will prompt the central bank to boost borrowing costs for the second time in two months, setting back efforts to arrest an economic slowdown.
The Reserve Bank of India will raise its repurchase rate to 7.75 percent from 7.50 percent today, according to 32 of 42 economists in a Bloomberg survey. One forecasts a move to 8 percent and nine see no change. Policy must tackle elevated inflation amid “tepid” growth, the RBI said in a report yesterday. The rupee has rebounded almost 12 percent from a record low of 68.845 per dollar in August, helping cut the cost of imports and aiding the RBI’s efforts to curb price gains.
“The stance and recent action by the new governor suggest the odds of a rate hike have increased significantly,” strategists at Credit Agricole CIB, including Frances Cheung in Hong Kong, wrote in a research report today. “However, the recovery of the rupee since September suggests the RBI could be tempted to keep rates unchanged in order not to add to the Indian economic soft patch and buy time to gauge where inflation goes looking forward.”
The rupee fell 0.2 percent to 61.66 per dollar as of 9:51 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, dropped 59 basis points, or 0.59 percentage point, to 10.8 percent.
India’s gross domestic product rose 5 percent in the year ended March 2013, the slowest pace since 2003. Wholesale price inflation accelerated to 6.46 percent in September, the most in seven months, official data show.
The RBI may further scale back emergency steps that were unveiled last quarter to stem the rupee’s slide, according to Kotak Mahindra Bank Ltd. The measures included curbs on cash-supply and special foreign-exchange swaps for banks and oil refiners.
Governor Raghuram Rajan will cut the marginal standing facility rate by 25 basis points to 8.75 percent today, said Indranil Pan, an economist at Kotak Mahindra Bank. The monetary authority will announce its decisions at 11 a.m. in Mumbai.
The RBI has attracted $10.1 billion through concessional swaps for dollars raised by banks, the central bank said in an Oct. 23 statement. It is also supplying about $5 billion a month to refiners, Pan estimates.
Three-month onshore rupee forwards fell 0.3 percent to 63.02 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts dropped 0.2 percent to 63.07. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.