Rupee Volatility Climbs as Fed Rate Bets Spur Outflow Concern

A gauge of expected rupee swings climbed for a second day on speculation demand for Indian assets will wane as Federal Reserve officials suggested U.S. interest rates could rise next month.

The rupee has retreated 0.3 percent this week as Atlanta Fed President Dennis Lockhart called a June rate increase “a real option,” while San Francisco’s John Williams said he would support such a move at the next meeting provided the U.S. economy stayed on track. Foreign funds bought a net $4.7 billion of Indian shares in the last two months, while their holdings of local-currency government and corporate bonds rose 48.3 billion rupees ($726 million).

The rupee’s one-month implied volatility, used to price options, climbed eight basis points to 5.82 percent in Mumbai, data compiled by Bloomberg show. It rose as much on Wednesday. The currency was little changed at 66.5550 a dollar in the spot market.

“The volatility is rising on the back of expectations that the Fed will raise interest rates in June,” said Rohan Lasrado, Mumbai-based head of foreign-exchange trading at RBL Bank Ltd. “This has also led traders to stay away from making fresh bets, keeping the spot trading subdued.”

Even so, the implied volatility on developed-nation currencies is exceeding that of emerging markets for the first time in a year as a fragile global economy and confusion about central-bank policies lead to irregularities in financial markets. Options for the yen and the pound are pricing in more swings than the rupee and Poland’s zloty.

Indian sovereign bonds were steady on Thursday, with the yield on notes due January 2026 at 7.44 percent, according to prices from the central bank’s trading system.

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