Rupee’s Slide to Record Drags Down Bonds, Most Indian Stocks

India’s rupee sank to a record as investors favored the dollar on speculation U.S. policy makers will curb asset purchases, triggering concern about inflation in a nation that imports about 80 percent of its oil.

The rupee’s largest drop in more than 20 months dragged down the country’s bonds and most stocks on speculation the central bank will refrain from lowering borrowing costs this month. There is no need for the government to intervene to support the currency and the “panic” in the market is “unwarranted” as the drop is in line with other counterparts, Economic Affairs Secretary Arvind Mayaram said in New Delhi today. The Dollar Index rose for a second day and the greenback has gained against 21 of 24 emerging-market currencies in 2013.

“The rupee depreciation is partly due to the strengthening dollar overseas and India’s weak domestic fundamentals,” said Nick Verdi, a strategist at Barclays Plc in Singapore. “It will play a part in inflationary expectations and if the inflation data this week surprises on the upside, the market will get more nervous about a rate cut this month.”

The rupee slumped 1.8 percent to 58.1375 per dollar in Mumbai, the sharpest fall since September 2011, data compiled by Bloomberg show. It touched 58.1625, surpassing the previous record low of 57.3275 set in June 2012. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 116 basis points, or 1.16 percentage point, to 10.19 percent.

A report last week showed American employers took on 175,000 workers in May, more than the 163,000 median forecast in a Bloomberg survey. Federal Reserve Chairman Ben S. Bernanke, in recent testimony to Congress, said that the Fed “could” scale back its bond-buying program if the employment outlook shows “sustainable improvement.”

Bonds Retreat

The monetary authority is buying $85 billion of Treasury and mortgage bonds each month, and any reduction could reduce inflows into emerging markets and leave the rupee vulnerable to a record current-account deficit.

India’s bonds fell for a fourth day. The Reserve Bank of India, which has cut the repurchase rate by 75 basis points this year, will keep it at 7.25 percent at its June 17 review, according to 10 of 18 analysts in a Bloomberg survey. Eight see no change.

“Bonds will remain subdued as the currency’s sharp fall is likely to pressure inflation and make the central bank focus on external stability,” said Arvind Chari, a senior fund manager at Quantum Asset Management Co. in Mumbai. “We may see a status quo on interest rates for some time.”

The yield on the 7.16 percent government debt due May 2023 rose four basis points to 7.28 percent, according to the central bank’s trading system. The yield on the 8.15 percent note due June 2022 climbed nine basis points to 7.49 percent.

Retail Inflation

Consumer prices probably increased 9.05 percent in May, according to a Bloomberg survey of economists before the data is published on June 12, holding above 9 percent for the fifteenth straight month.

Fifteen stocks fell and 14 advanced on the benchmark S&P BSE Sensex, which added less than 0.1 percent to 19,441.07 at the close. Volume on the 30-stock measure was 29 percent less than the 30-day average. The 14-member S&P BSE Bankex lost 1.1 percent to the lowest level in almost two months. The broader S&P BSE 200 Index lost 0.4 percent to a six-week low.

“The chance of a rate cut next week appears dim as a weak rupee means we are importing inflation,” said D.K. Aggarwal, chairman of New Delhi-based SMC Investments & Advisors. “The Reserve Bank is in a fix on whether to drive investment or curb inflation.” The good news on the monsoon is being checkmated by the weakness in the rupee.’’

‘Panic Unwarranted’

“I think this is panic in the market, which is unwarranted because it started with the misinterpretation of what the Federal Reserve chairman had spoken of in terms of quantitative easing,” Economic Affairs Secretary Mayaram said in New Delhi. “They have now more than clarified that this is not imminent,” he said. “This will settle down in a while.”

Three-month onshore rupee forwards slid 1.5 percent to

58.84 per dollar, according to data compiled by Bloomberg. Offshore non-deliverable contracts dropped 1.1 percent to 58.90. 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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