Rupee Rebounds From Record Low as India Acts to Curb Speculation

India’s rupee rebounded from a record low after regulators took measures to curb speculation in currency derivatives.

The Reserve Bank of India barred banks from proprietary trading in currency futures and exchange-traded options, it said on its website yesterday. The Securities and Exchange Board of India said separately it will raise margin requirements and cap open positions in such contracts. The rupee plunged to an unprecedented 61.2125 per dollar yesterday on concern the U.S. will cut stimulus that boosted dollar supply. The RBI and state refiners are looking at ways to manage dollar demand for energy imports, an oil ministry official briefed on the matter said.

The rupee advanced 0.8 percent to 60.1450 per dollar in Mumbai, the biggest gain since June 28, according to prices from local banks compiled by Bloomberg. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 34 basis points, or 0.34 percentage point, to 13.21 percent.

“The tightening of derivative trading, coupled with potential measures to curtail the impact of oil-related dollar demand, could provide a reprieve to the rupee,” Irene Cheung, a Singapore-based strategist with ANZ Banking Group Ltd., wrote in a research report today. “That said, we continue to see the rupee under severe pressure, as Fed quantitative-easing tapering could continue to trigger capital outflows from India.”

Fed Chairman Ben S. Bernanke signaled May 22 that the central bank’s asset-buying program could be tapered should the job market continue to improve. The unemployment rate held at 7.6 percent in June, near a four-year low.

Curbing Speculation

India’s central bank, concerned about the fastest growth in currency derivatives trading in more than three years, asked overseas funds on June 26 to prove they aren’t speculating on the exchange rate.

Turnover in futures and options involving the rupee climbed 47 percent to a daily average of 387.7 billion rupees ($6.4 billion) in June on the National Stock Exchange of India Ltd., the biggest jump since January 2010. The central bank has also enquired about foreign lenders’ open positions involving the rupee. Global investors can use rupee derivatives in the over-the-counter market only to protect their holdings of Indian shares and debt.

The RBI and state refiners including Indian Oil Corp. are exploring the possibility of mandating a single state-run bank to sell dollars to the firms, eliminating bids that fuel currency speculation, the oil ministry official said, asking not to be identified because the information isn’t public.

Current Account

Commonwealth Bank of Australia is looking to sell the Indian currency on bouts of strength as it doesn’t “see speculation as being the only woe that the rupee faces,” Singapore-based strategist Andy Ji said. “I don’t see the current-account deficit narrowing any time soon, and concerns remain with much below-trend growth.”

India’s current-account gap increased to an all-time high 4.8 percent of gross domestic product in the year ended March 31, official data show.

ANZ will also look to sell the rupee in the offshore market when the three-month rupee contracts gain to around 60 per dollar, according to today’s report.

The rupee will drop to 62 per dollar by end-2013, according to Nomura Holdings Inc., the most accurate forecaster for the currency in the last four quarters, according to data compiled by Bloomberg. Second-ranked JPMorgan Chase & Co. shares that forecast, while No. 3, Canadian Imperial Bank of Commerce, predicts 61.50.

Carry Trades

Carry traders, who borrow in a low-yield currency to buy one with higher rates, lost 6 percent on rupee investments using dollars since the start of June, the worst performance among 11 Asian currencies, after earning 0.8 percent this year through May 31, data compiled by Bloomberg show.

Global funds cut holdings of rupee debt by $1.1 billion this month through July 5, following a record $5.4 billion withdrawal in June, exchange data show.

Three-month onshore rupee forwards jumped 0.9 percent to 61.28 per dollar, according to data compiled by Bloomberg. Offshore non-deliverable contracts rose 0.9 percent to 61.40. 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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