Rupee Drops as World Bank Forecast Undermines Local Intervention
India’s rupee weakened after the World Bank cut growth forecasts and on concern global central banks will pare monetary stimulus, countering local policy makers’ steps to boost dollar supplies.
The global economy will expand 2.2 percent in 2013, compared with a January forecast of 2.4 percent, the World Bank said yesterday. The Reserve Bank of India intervened June 11-12 to prevent the rupee falling to 60 per dollar, said two people with knowledge of the matter who asked not to be named as the information isn’t public. Losses will be limited after some foreign investors were allowed to buy more debt and because the RBI will sell dollars, according to Mizuho Corporate Bank Ltd.
“Our base-case scenario is the RBI will come in hard, and it will come in fast,” said Vishnu Varathan, an economist at Mizuho Corporate Bank in Singapore. “However, in the medium term, the outlook is more dependent on dollar strength.”
The rupee depreciated 0.6 percent to 58.1325 per dollar as of 9:07 a.m. in Mumbai, according to data compiled by Bloomberg. It touched an all-time low of 58.9850 on June 11. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell eight basis points, or 0.08 percentage point, to 11.30 percent.
Long-term investors, including sovereign-wealth funds, multilateral agencies and global central banks, can buy $5 billion more Indian sovereign debt, the central bank said in a statement yesterday. The cap now stands at $30 billion, compared with $25 billion earlier.
The RBI’s policy is to intervene in the currency market only to smooth volatility, Governor Duvvuri Subbarao said last month. The central bank doesn’t comment on daily market movements, Alpana Killawala, Mumbai-based spokeswoman for the RBI, said by telephone on June 11.
Finance Minister Palaniappan Chidambaram will address the media at 10 a.m. in New Delhi today. Policy makers are weighing steps including a debt offering to Indians living abroad to attract investment and offset a record current-account deficit, Raghuram Rajan, the top adviser at the finance ministry, told reporters on June 11.
Fitch Ratings revised India’s credit-rating outlook to stable from negative yesterday. The move “reflects the measures taken by the government to contain the budget deficit” and “some, albeit limited, progress in addressing some of the structural impediments to investment and economic growth,” the company said.
The U.S. Federal Open Market Committee meets next week after the Bank of Japan this week left its lending program unchanged. Fed Chairman Ben S. Bernanke said May 22 the monetary authority could scale back stimulus efforts should employment show “sustainable improvement.” The $85 billion of bond purchases each month debases the dollar and contributes to inflows to emerging markets.
Three-month onshore rupee forwards fell 0.1 percent to 58.78 per dollar, according to data compiled by Bloomberg. Offshore non-deliverable contracts dropped 0.5 percent to 59.15. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
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