India’s Rupee Completes Weekly Drop on Growth, Policy Concerns

India’s rupee completed its first weekly loss since the five days ended March 1 on concern political instability and limited room to lower borrowing costs will derail efforts to revive the economy.

Prime Minister Manmohan Singh’s main coalition partner withdrew support this week, threatening the biggest policy revamp in a decade. The Reserve Bank of India, which cut interest rates for a second time this year on March 19, said “persisting” inflation curbs scope for further reductions. The currency is particularly vulnerable due to the nation’s record current-account deficit, according to BNP Paribas Securities India Pvt Ltd.

“Progress will be difficult and slow and there are unlikely to be any huge reform steps taken,” Kenneth Akintewe, a Singapore-based fund manager at Aberdeen Asset Management Plc, which oversees $314 billion globally, said in an e-mailed response to questions. “The currency will stay range-bound and somewhat volatile.”

The rupee declined 0.6 percent this week to 54.3425 per dollar in Mumbai, according to data compiled by Bloomberg. It fell 0.1 percent today. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 39 basis points, or 0.39 percentage point, to 8.58 percent this week. The rate climbed 24 basis points today.

Current Account

The shortfall in India’s current account, the broadest measure of trade, is a “greater worry” than the budget gap and the government needs to attract capital inflows, Finance Minister Palaniappan Chidambaram said on Feb. 28.

The withdrawal of the Dravida Munnetra Kazhagam party may make it relatively difficult to cut fuel subsidies and improve public finances, according to BNP Paribas Securities. The bank studied the impact on the nation’s markets from periods of political uncertainty including the Bharatiya Janata Party’s 2004 election loss and when communist parties pulled support in 2008 protesting an India-U.S. nuclear treaty.

“Under present circumstances, the rupee appears more vulnerable than it was in 2008 or 2004,” Manishi Raychaudhuri and Gautam Mehta, analysts at BNP Paribas Securities, wrote in a March 20 report. “If flows stop the rupee could mean revert to its fair value,” which is 5 percent or 6 percent lower, they wrote.

Three-month onshore rupee forwards traded at 55.42 per dollar, compared with 55.34 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.37 versus 55.33. 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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