Rupee Drops to 11-Month Low on Concern Fed Will Pare Stimulus

India’s rupee weakened to an 11-month low on concern the Federal Reserve will scale back asset purchases that have spurred fund flows into emerging markets.

Fed Chairman Ben S. Bernanke said last month the central bank may reduce asset purchases if there are signs of sustained improvement in the world’s largest economy. A report last week showed U.S. consumer confidence at a five-year high. India’s economy expanded less than 5 percent for a second quarter, data showed on May 31, a day after central bank Governor Duvvuri Subbarao said the nation’s balance of payments is under stress.

“Right now, there is still debate on about the outlook for policy in India and abroad, and investors will be cautious,” said Vikas Babu, a trader at state-run Andhra Bank in Mumbai. “We will see exporters selling dollars as well, so there should be some respite for the rupee.”

The rupee depreciated 0.5 percent to 56.7650 per dollar in Mumbai, according to data compiled by Bloomberg. It earlier touched 56.8250, the weakest level since June 28, 2012. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell 11 basis points, or 0.11 percentage point, to 9.12 percent.

International investors poured almost $20 billion into India’s stocks and bonds this year, exchange data show.

The shortfall in India’s current account, the broadest measure of trade, probably widened to 5 percent of gross domestic product in the year ended March 31, Subbarao said on May 30. India’s gross domestic product increased 4.8 percent in the three months ended March 31 from a year earlier.

Three-month onshore rupee forwards traded at 57.61 per dollar, compared with 57.42 on May 31, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 57.72 versus 57.60 a month ago. 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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