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India Rupee Drops as U.S. Factory Data Adds to Fed Taper Outlook

India’s rupee weakened after U.S. manufacturing data boosted speculation the Federal Reserve will pare stimulus as early as this month, a policy that’s driven inflows to emerging-market assets.

The U.S. Institute for Supply Management’s factory index climbed in November to the highest level in more than two years, beating economists’ estimates, a report showed yesterday. The rupee may also come under pressure as the Reserve Bank of India stopped direct supplies of dollars to oil importers.

“The timing and the extent of the Fed’s taper of quantitative easing is likely to remain a key determinant of the currency market dynamics for emerging markets as a whole,” analysts at Kotak Mahindra Bank Ltd., including Indranil Pan in Mumbai, wrote in a research report today. “For India, this will also be overlaid with domestic issues.”

The rupee dropped 0.1 percent to 62.3650 per dollar in Mumbai, after advancing 0.2 percent yesterday, according to prices from local banks compiled by Bloomberg. It will trade between 61 and 64 for the rest of the financial year through March 2014, Kotak Mahindra Bank predicts.

The U.S. ISM manufacturing index climbed to 57.3 in November, the highest level since April 2011, from 56.4 the previous month. That was more than the 55.1 median estimate in a Bloomberg survey. Jobless claims and payrolls figures are due later this week.

Local Concerns

Oil refiners have been buying all of their dollars from the local market since last week, the RBI said in a statement yesterday. The companies have been asked to spread out their greenback purchases evenly and the central bank said it will consider resuming direct supplies on the “rare days” when there’s a spurt in demand.

The monetary authority is winding down emergency measures taken when the rupee plunged to an unprecedented 68.845 against the U.S. currency on Aug. 28. The offer of discounted swaps for dollars raised by banks through deposits from Indians living abroad and overseas debt attracted $34 billion and have been closed, the RBI added in the statement.

India’s narrowest current-account deficit since at least 2010 will limit the currency’s losses, according to the Kotak Mahindra Bank analysts. The broadest measure of trade shrank to $5.2 billion in the quarter ended Sept. 30, the smallest shortfall in data going back to June 2010, according to figures from the RBI published after the market shut yesterday.

One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, fell four basis points, or 0.04 percentage point, to 12.23 percent.

Three-month offshore non-deliverable rupee forwards weakened 0.2 percent to 63.74 per dollar, according to data compiled by Bloomberg. 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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