Photographer: Dhiraj Singh/Bloomberg

Rupee Volatility Drops to Five-Month Low as Stock Inflows Climb

  • Currency has risen most in emerging Asia in December
  • Sovereign bonds due in 2025 set for a monthly advance

A gauge of expected swings in the rupee slumped to the lowest level since July on signs demand for Indian stocks is picking up as the Federal Reserve’s interest-rate increase removed a key uncertainty for investors.

Global funds have been net buyers of local equities every day since the U.S. central bank raised rates mid-December for the first time in a decade. Overseas holdings of rupee-denominated bonds are seen rising as India grants investors access to an additional 165 billion rupees ($2.5 billion) of sovereign and state-government notes from Jan. 1, part of a September plan to increase foreign-investment limits in phases.

“Recent inflows to stocks, coupled with anticipation of bond purchases by foreigners, are helping the rupee,” said Anindya Banerjee, associate vice-president for currency derivatives at Kotak Securities Ltd. in Mumbai. “Even as subsequent rate hikes by the Fed are seen pressuring emerging-market currencies in 2016, the rupee will weaken less given India’s improved economic fundamentals.”

One-month implied volatility, a measure used to price options, dropped 10 basis points in a third day of declines to 5.49 percent in Mumbai, data compiled by Bloomberg show. It has plunged 121 basis points this month.

In the spot market, the rupee was little changed at 66.3875 a dollar, prices from local banks compiled by Bloomberg show. The currency has climbed 0.4 percent in December, the best performance in Asia excluding Japan, paring its loss in 2015 to 5 percent.

Bonds Gain

Overseas investors bought $9.4 million more local shares than they sold on Dec. 29, taking total purchases since Dec. 16 to $434.8 million. Inflows for 2015 are at $3.1 billion. Foreign holdings of Indian government and corporate debt have risen by 487 billion rupees this year, data compiled by Bloomberg show.

The yield on sovereign notes due May 2025 decreased one basis point on Wednesday to 7.75 percent, according to prices from the central bank’s trading system. It has fallen four basis points in December, after rising in each of the previous two months. The benchmark 10-year yield has dropped 11 basis points in 2015, poised for a second straight annual decline.

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