Rupee Declines This Week as Rajan Future Debate Adds to Fed Risk

  • Ten-year sovereign notes also on course for weekly drop
  • Foreign holdings of rupee-denominated debt continue to slide

India’s rupee declined this week as speculation mounted on whether central bank Governor Raghuram Rajan would serve a second term.

Rajan, who is credited with curbing currency volatility by more than half since taking charge at the Reserve Bank of India in 2013, was reported by a local newspaper on Wednesday to be not seeking an extension to his three-year term that ends early September. Overseas holdings of rupee bonds were set to drop for a third week amid signs the Federal Reserve will raise interest rates soon.

The rupee weakened 0.3 percent from May 27 to 67.26 a dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It was little changed on Friday. Its one-month implied volatility, used to price options, rose three basis points this week to 6.12 percent, data compiled by Bloomberg show. The gauge, which climbed 39 basis points in May, surged to as high as 23 percent in September 2013, the time when Rajan took over.

“Speculation about Rajan’s tenure has led to sentimental dollar buying and volatility in the rupee,” said Hari Chandramgethen, head of foreign-exchange trading at South Indian Bank Ltd. in Mumbai. “The Fed’s indication about raising rates also weighed on emerging-market currencies, including the rupee.”

Debt Outflow

A U.S. jobs report due later Friday will help shape expectations for the timing of the Fed’s next move after Chair Janet Yellen said last week the strengthening economy would probably warrant an increase in borrowing costs “in the coming months.” Overseas holdings of Indian government and corporate bonds fell by 12.9 billion rupees ($192 million) over the last four days, heading for a third weekly decline, National Securities Depository Ltd. data show.

The debate around Rajan’s reappointment intensified as a member of Prime Minister Narendra Modi’s ruling party called for him to be dismissed. Wednesday’s report by Bengali-language newspaper Anandabazar Patrika, which cited unidentified sources close to the central bank chief, said Rajan doesn’t want an extension, though Modi wants him to stay on. The RBI, the Prime Minister’s Office and the Finance Ministry all had no comment on the newspaper report.

Sovereign bonds completed a weekly loss. The yield on notes due January 2026 rose two basis points to 7.49 percent, its highest close since March 30, according to prices from the central bank’s trading system. It was little changed on Friday.

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