Rupee Volatility Drops Most in Nine Months as Stock Inflows Jump

  • Gauge of one-month implied volatility slumps 52 basis points
  • Currency completes longest run of gains since early April

A gauge of expected swings in India’s rupee dropped the most in nine months as a rally in local stocks lured foreign inflows.

Overseas investors have poured a net $471 million into equities so far this month, compared with purchases of $386 million in May, data compiled by Bloomberg show. Inflows have picked up as a forecast for the strongest monsoon in two decades, a recovery in company earnings and the pushing back of expectations for U.S. interest-rate increases spurred gains in Indian stocks. The benchmark S&P BSE Sensex index is up 1.3 percent in June after rallying 16 percent in the last three months.

The rupee’s one-month implied volatility, used to price options, slumped 52 basis points to 5.58 percent in Mumbai, data compiled by Bloomberg show. That’s the gauge’s steepest drop since August last year. In the spot market, the rupee strengthened for a fifth day, the longest run of gains since early April. The currency rose 0.2 percent to 66.65 a dollar, according to prices from local banks compiled by Bloomberg.

“Currency volatility has dropped on account of the positive sentiment that’s driving equity markets,” said Bhupesh Bameta, head of research for currencies and rates at Edelweiss Financial Services Ltd. in Mumbai. “Markets believe a June U.S. rate hike is off the table and even one in July looks difficult after the poor jobs data.”

The rupee’s recent advance has helped pare its 2016 loss to 0.8 percent, still Asia’s worst performance after the Chinese yuan, data compiled by Bloomberg show. Edelweiss expects the rupee to stay in a 66.40-66.90 a dollar range for the rest of the week.

Sovereign bonds fell, with the yield on notes due January 2026 climbing one basis point to 7.49 percent, prices from the central bank’s trading system show. The yield rose one basis point on Tuesday after the Reserve Bank of India said the “surprise” acceleration in consumer inflation to a three-month high in April made “the future trajectory of inflation somewhat more uncertain.” The monetary authority kept benchmark borrowing costs unchanged at a five-year low.

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