India Rupee Drops as RBI Sees Near-Zero Scope for Policy Easing

India’s rupee fell the most in more than a month as central bank Governor Duvvuri Subbarao said there was very little chance monetary policy would be eased further. Government bonds declined.

“The baseline case is that the possibility of easing is practically non-existent,” Subbarao said in a Bloomberg TV India interview on May 4, after cutting the benchmark interest rate to 7.25 percent a day earlier. Any expectation that the outlook is for “another salvo” of loosening is “inaccurate,” he said, adding inflation and the current-account deficit will determine policy shifts. The rupee erased earlier gains before data that economists predict may show European retail sales fell 0.1 percent in March from the previous month.

“We expect downward pressure on the rupee” after the governor’s comments, Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong, wrote in a research report today.

The rupee declined 0.5 percent to 54.1875 per dollar in Mumbai, the biggest drop since April 4, according to data compiled by Bloomberg. The currency earlier gained as much as 0.3 percent. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 16 basis points, or 0.16 percentage point, to 8.58 percent.

The currency strengthened earlier today after reports on May 3 showed the U.S. unemployment rate fell to a four-year low and payrolls expanded more than economists forecast.

Debt Buying

The Reserve Bank of India will buy as much as 100 billion rupees ($1.9 billion) of debt due in 2017, 2024, 2025 and 2032 tomorrow, the monetary authority said in an e-mailed statement after the market closed on May 3. The RBI may have to boost the frequency of debt purchases to manage cash in the banking system until economic conditions allow more easing, Kowalczyk said.

The yield on the 8.15 percent bonds due June 2022 rose one basis point, or 0.01 percentage point, to 7.75 percent in Mumbai, according to the central bank’s trading system.

Three-month onshore rupee forwards traded at 55.19 per dollar, compared with 54.92 on May 3, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 54.90 versus 54.42. 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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