Rupee Volatility Drops to 3-Week Low on Stability Expectations

  • Rupee, 10-Year Bond Yield Little Changed on Thursday
  • DBS says sovereign bond yields stable on rate-cut speculation

A gauge of expected swings in India’s rupee dropped to a three-week low on speculation the central bank will maintain a stable exchange rate.

One-month implied volatility, used to price options, fell 16 basis points to 7.38 percent in Mumbai, data compiled by Bloomberg show. That’s the lowest since Aug. 11. The measure has retreated 42 basis points this week.

“The volatility has narrowed mainly due to intervention by the central bank,” said Gaurav Sharma, a senior currency analyst at Religare Commodities Ltd. in Noida, near New Delhi. “The RBI now has enough ammunition to protect the rupee, and it will continue to intervene to make sure it remains stable.”

India will use its foreign-exchange reserves to stem rupee swings as stocks and currencies fall around the globe, Reserve Bank of India Governor Raghuram Rajan said Aug. 24, adding that the nation has about $380 billion in reserves. Volatility surged close to 10 percent last month as China’s surprise devaluation of the yuan on Aug. 11 roiled global markets.

The central bank has been buying dollars to build reserves to shield local markets from global events, including a potential increase in U.S. interest rates. It bought a net $565 million in the spot market alone in June, data compiled by Bloomberg show, taking total purchases in 2015 to $36 billion. Speculation the Federal Reserve will refrain from tightening this month amid a fragile global economy is also helping curb currency swings, Sharma said.

In the spot market, the rupee fell 0.1 percent to 66.2450 a dollar, according to prices from local banks compiled by Bloomberg. It weakened 3.5 percent in August, the steepest monthly slide in two years.

The 10-year bond yield was little changed at 7.75 percent, according to prices from the RBI’s trading system. Speculation of impending rate cuts by the central bank is likely to keep government bond yields “relatively stable,” DBS Bank Ltd. wrote in a report Thursday.

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