India Rupee Falls as Fund Outflows Increase on Fed Exit Outlook

India’s rupee fell, extending a seven-week slide, after global investors boosted sales of local bonds and stocks on the prospect of the U.S. paring stimulus policies that have boosted dollar supply.

Foreign funds pulled $4.6 billion from Indian debt and shares in June, exchange data show. The nation’s current-account deficit widened to a record of about 5 percent of gross domestic product in the year ended March 31, the government estimates. The Dollar Index, which tracks the greenback against the currencies of six trade partners, rose for a fourth day after the Federal Reserve signaled on June 19 it may taper its bond-buying program this year and end it in 2014.

“Fund flows are going to be volatile given the outlook for the Fed phasing out its stimulus measures,” said Vikas Babu, a trader at state-run Andhra Bank in Mumbai. “So, from the current-account view, the rupee is a bit more vulnerable. Only intervention can curb the rupee’s slide.”

The rupee slid 0.7 percent to 59.6750 per dollar in Mumbai, according to data compiled by Bloomberg. It touched a record low of 59.98 on June 20. The currency declined 5.3 percent this month, Asia’s worst performance. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose six basis points, or 0.06 percentage point, to 12.59 percent.

The Reserve Bank of India sold dollars in the onshore forward market to prevent the spot rupee from extending its slide toward the record low, according to two traders familiar with the matter. Intervention in the forward segment also avoids causing a shortage of rupees in the system, the traders said, asking not to be named as the information isn’t public.

Forwards Drop

India is prepared to curb currency volatility, Raghuram Rajan, chief economic adviser at the finance ministry, said in New Delhi on June 20. The dollar’s 14-day relative-strength index against the rupee was at 75.6, above the 70 threshold that signals the greenback’s rally is poised to end.

Three-month onshore rupee forwards dropped 1 percent from June 21 to 60.76 per dollar, according to data compiled by Bloomberg. Offshore non-deliverable contracts fell 0.3 percent to 60.91. 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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