Rupee Plunge Prompts RBI Intervention; Bonds, Stocks Tumble

India’s rupee tumbled to a record, prompting the central bank to intervene to support the currency, after the U.S. signaled it will phase out a stimulus program. Stocks and bonds plunged the most in at least a year.

The Federal Reserve said yesterday it could taper its $85 billion in monthly bond buying later this year and halt the purchases in mid-2014 as long as the U.S. economy performs in line with the central bank’s projections. The Reserve Bank of India probably sold dollars around the unprecedented 59.98 level to prevent the rupee from sliding past 60 a dollar, three traders said, asking not to be named as the information isn’t public.

“There will be pain due to the current-account deficit and as leveraged investors are pulling money from Indian debt,” said N. Srinivasan Venkatesh, Mumbai-based head of treasury at IDBI Bank Ltd. “Policy makers will now have to put their heads together to think about more structural, long-term fixes.”

The rupee weakened 1.4 percent to 59.5750 per dollar at the 5 p.m. close in Mumbai, after earlier dropping to an all-time low of 59.9800, data compiled by Bloomberg show. The currency has plunged 8.9 percent this quarter, Asia’s worst performance.

The S&P BSE Sensex plunged 2.7 percent to 18,719.29, the most since Sept. 22, 2011. Volume was 49 percent more than the 30-day average. ICICI Bank Ltd., the country’s biggest private lender, fell to a two-month low. Jindal Steel & Power Ltd. sank to a four-year low, the worst performer on the Sensex today.

The Bank of New York Mellon India ADR Index dropped 3.4 percent to the lowest since September at 10:32 a.m. in New York. American depositary receipts of Wipro Ltd. fell 2.3 percent to $7.09, the lowest since October. Infosys Ltd. ADRs retreated 2.3 percent to $39.99, while Tata Motors Ltd. declined 2.6 percent to $23.92.

Fund Outflows

India is prepared to act to curb currency volatility, Raghuram Rajan, chief economic adviser at the finance ministry, said in New Delhi today.

The Sensex has retreated 6.7 percent since Bernanke first signaled on May 22 that policy makers may pare stimulus efforts that has boosted flows to emerging markets. Overseas funds have pulled $3.4 billion from rupee debt this month and $402 million from local stocks, exchange data show. That reduced this year’s net inflows into equities to $14.7 billion, still a record for the period, the data show. The Sensex is valued at 12.8 times projected 12-month profits, the lowest reading since April 17.

“Valuations of the Indian market have become attractive after the selloff,” Rajesh Cheruvu, chief investment officer at RBS Private Banking India, said in an interview today. “If it goes down further, you might see flows coming back to India. It doesn’t make any sense for foreign portfolio managers, given the currency and the market decline.”

RBI Intervention

One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, rose 125 basis points, or 1.25 percentage point, to 12.62 percent, data compiled by Bloomberg show.

The rupee pared losses amid speculation the Reserve Bank of India intervened to curb exchange-rate losses. A weaker currency spurs inflation and worsens the trade gap in a nation that imports 80 percent of its oil. India’s current-account deficit widened to an unprecedented 5 percent of gross domestic product in the year ended March 31, the government estimates.

The central bank will intervene in the currency market if necessary to curb speculative activity, Planning Commission Deputy Chairman Montek Singh Ahluwalia said in New Delhi today. Alpana Killawala, a Mumbai-based spokeswoman for the RBI, didn’t immediately respond to an e-mail seeking comment on the rupee’s decline.

Lenders, Metals

Three-month onshore rupee forwards dropped 2.1 percent to 60.92 per dollar, according to data compiled by Bloomberg. Offshore non-deliverable contracts fell 1.8 percent to 60.93. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

ICICI Bank sank 3.7 percent to 1,046.15 rupees, the lowest close since April 12. HDFC Bank Ltd. lost 4.1 percent to 638.2 rupees. Tata Steel Ltd. sank 6.4 percent to 272.55 rupees, the most since February 2012. Aluminum maker Hindalco Industries Ltd. slumped 6.3 percent to 97.8 rupees. Copper maker Sterlite Industries India Ltd. slumped 4.5 percent to 81.5 rupees, the lowest level in more than four years.

The S&P BSE India Metal index of 11 companies plunged 4.6 percent to a four-year low, while the 11-member S&P BSE India Realty index of 11 developers crashed 5.2 percent, the biggest loss among the 13 sectoral gauges compiled by the BSE Ltd.

Rate Cuts

The yield on benchmark government bonds due 2022 surged the most since the notes were issued a year earlier as trading resumed after a halt triggered by a breach in an indicative daily band. The daily cap on yield swings has been removed for today, C.E.S. Azariah, Mumbai-based chief executive officer at the Fixed Income Money Market and Derivatives Association of India, which sets the limit, said in a phone interview.

“The rupee’s weakness has reduced the scope for interest-rate cuts in the near term,” said Srinivasa Raghavan, the Mumbai-based executive vice president of treasury at Dhanalaxmi Bank Ltd. “That is driving yields higher.”

The yield on the 8.15 percent notes due June 2022 jumped 17 basis points to 7.64 percent, according to the central bank’s trading system. The rate is the highest since May 9.

“It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth,” the RBI said on June 17, after keeping the benchmark rate unchanged at 7.25 percent. “While several measures have been taken to contain the current-account deficit, we need to be vigilant about the global uncertainty, the rapid shift in risk perceptions and its impact on capital flows.”

Debt Auction

The shortfall in India’s current account, the broadest measure of trade, climbed to a record high of around 5 percent of gross domestic product in the year ended March 31, the government estimates.

India sold 391.71 billion rupees of debt-purchase limits to foreign investors at an auction today, lower than the aim of 420.22 billion rupees, two people familiar with the matter say, asking not to be identified as they aren’t authorized to speak to the media. This is the first time since October that an auction has been undersubscribed.

The Reserve Bank of India is paying local primary dealers 4.19 paise per 100 rupees to underwrite the 2023 bond at tomorrow’s auction. The fee is the highest for a 10-year bond in at least a year, central bank data show.

“The underwriting fee reflects perception of losses and possibility of devolvement,” said Sandeep Bagla, Mumbai-based executive vice president at ICICI Securities Primary Dealership Ltd. “In a market that is as volatile as today, underwriters would want to protect themselves from losses arising from devolvement.”

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