Rupee Volatility Sinks to 2008 Low on Oil Drop, RBI Intervention

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A gauge of expected swings in India’s rupee slumped to a seven-year low on speculation cheaper oil will help cut the current-account deficit and the central bank will intervene to keep the exchange rate stable.

Brent crude prices have fallen 11 percent in July, taking the past year’s drop to 47 percent and paring costs for India, which relies on imports for about three quarters of its oil. The Reserve Bank of India’s dollar purchases propelled foreign-exchange reserves to a record last month, boosting investor confidence the rupee will be able to withstand any capital outflows due to external events, including when the Federal Reserve raises interest rates.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, declined for a seventh day, falling nine basis points to 4.79 percent in Mumbai, the lowest since February 2008, data compiled by Bloomberg show. That’s 400 basis points lower than this year’s high of 8.79 percent reached in May.

“Lower crude prices have wiped out a large part of the dollar demand from the market,” said Ankur Jhaveri, co-head of currency and rates at Edelweiss Financial Services Ltd. in Mumbai. “The rupee’s volatility has been managed well by the central bank through intervention.”

The RBI bought $35.7 billion from the spot market alone in the five months to May, central bank data show. India’s June trade deficit narrowed to $10.8 billion from $11.8 billion a year earlier as the value of oil imports plunged 35 percent, official data showed last week.

In the spot market, the rupee weakened 0.3 percent Monday to 63.6675 a dollar, according to prices from local banks compiled by Bloomberg. The central bank’s intervention is only to mitigate volatility, Deputy Governor Urjit Patel said in an interview with the CNBC Awaaz television channel earlier this month.

Government bonds fell, with the yield on the notes due May 2025 rising one basis point to 7.84 percent, according to prices from the RBI’s trading system.

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