India Rupee Trades Near Record Low as Fed Risk Slows Inflows

India’s rupee held at yesterday’s record closing low as a slowdown in inflows leaves the currency vulnerable to a current-account deficit.

Global funds have cut rupee debt holdings by $5.4 billion since May 22, when Federal Reserve Chairman Ben S. Bernanke first signaled stimulus could be scaled back, and are set to end 12 months of net buying of Indian stocks, exchange data show. The shortfall in India’s current account widened to an unprecedented 5 percent of gross domestic product in the year through March, the government estimates before data due June 28.

A Fed stimulus cut poses a risk not just to India’s capital account, especially given its current-account gap, but is also a “big negative for the rupee as flows dwindle further,” Religare Capital Markets Ltd. analysts including Mumbai-based Tirthankar Patnaik wrote in a report today. “We see the pain on the rupee continuing for now, with some short-term support provided by lower gold imports in June.”

The rupee was unchanged from yesterday at 59.6750 per dollar in Mumbai, according to data compiled by Bloomberg. It is 0.5 percent away from an unprecedented 59.98 touched June 20 and 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, fell 68 basis points, or 0.68 percentage point, to 11.92 percent.

The rupee could stay at the current levels for some time, Chakravarthy Rangarajan, chairman of Prime Minister Manmohan Singh’s economic advisory council, said in a Bloomberg TV India interview today. Global flows are still adequate to fund India’s needs, he added.

Gold Demand

The All India Gems & Jewellery Trade Federation, a group that represents about 300,000 gold jewelers, manufacturers, wholesalers, retailers and distributors, will send notices to members asking them to halt sales of coins and bars to retail investors until the current-account gap stabilizes, Chairman Haresh Soni said by phone from New Delhi yesterday. The curbs may reduce demand by about 20 percent in the world’s largest bullion consumer, he said.

Three-month onshore rupee forwards rose 0.3 percent from yesterday to 60.61 per dollar, according to data compiled by Bloomberg. Offshore non-deliverable contracts gained 0.3 percent to 60.76. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

The Reserve Bank of India sold dollars in the onshore forwards market yesterday, according to two traders familiar with the matter who asked not to be named as the information isn’t public.

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