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 world economy will expand 2.2 percent in 2013, compared with a January forecast of 2.4 percent, the lender said yesterday. Finance Minister Palaniappan Chidambaram today signaled foreign-direct investment caps will be eased further soon and said steps are being taken to curb rupee swings. The currency’s losses will be limited after some foreign investors were allowed to buy more debt and because the Reserve Bank of India will sell dollars, according to Mizuho Corporate Bank Ltd.

“While we were not expecting any big-bang announcements from the finance minister today, even our meager expectations have not been met with Chidambaram offering only the hope of more reforms by end-June,” Priyanka Kishore, a strategist at Standard Chartered Plc in Mumbai, wrote in a research note today. A re-test of the all-time low “is also possible, if the RBI doesn’t show a strong hand,” she wrote.

The rupee depreciated 0.3 percent to 57.9900 per dollar 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, rose three basis points, or 0.03 percentage point, to 11.41 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 intervened on June 11 and 12 to prevent the rupee falling to 60 per dollar, said two people with knowledge of the matter who asked not to be named because the information isn’t public.

Policy Steps

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.

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. Chidambaram today said no decision has been taken on the matter as yet.

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,” Fitch said.

Dollar Debase

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 0.6 percent to 59.05 per dollar, according to data compiled by Bloomberg. Offshore non-deliverable contracts dropped 0.3 percent to 59.03. 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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