India’s Rupee Drops Before Bernanke Testimony; Bonds Advance

India’s rupee fell, erasing earlier gains, as investors favored the dollar before Federal Reserve Chairman Ben S. Bernanke testifies to Congress. Bond yields dropped after the central bank signaled the rates are too high.

Bernanke will appear before the House Financial Services Committee today and senators tomorrow to present the semi-annual monetary policy report. The rupee has rebounded 3.1 percent from a record low of 61.2125 touched July 8 as Bernanke said last week the U.S. would need accommodative monetary policy for the foreseeable future and as the Reserve Bank of India raised two interest rates to support the currency.

“It seems unlikely that Bernanke’s comments will be perceived as dovish as last week,” analysts at Brown Brothers Harriman & Co., including New York-based Marc Chandler, wrote in a report today. “The rupee has stabilized after this week’s RBI measures, but remains vulnerable to a turn in emerging-market sentiment.”

The rupee declined 0.1 percent to 59.3450 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It touched 59.0450 earlier, the strongest level since July 1. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, climbed two basis points, or 0.02 percentage point, to 12.52 percent. The Dollar Index, which tracks the greenback against six major counterparts, rose 0.2 percent.

The Reserve Bank of India increased the marginal standing facility rate and the bank rate to 10.25 percent from 8.25 percent, according to a July 15 statement. The monetary authority said also that it will sell 120 billion rupees ($2 billion) of bonds maturing between 2017 and 2030 through open-market operations tomorrow.

Lending Cap

The RBI has also began capping the amount it lends to commercial banks through the daily repurchase window to around 750 billion rupees. This compares with an average 872 billion rupees borrowed each day this year through July 15, according to central bank data.

The measures pushed the interbank call money rate as much as 295 basis points higher to 9.25 percent today, the biggest gain since March 2012, and contributed to the failure of a weekly treasury bill auction. The RBI rejected bids worth 293 billion rupees ($4.9 billion) received for a combined 120 billion rupees of notes offered, it said in an e-mailed statement.

“The market moves have been a knee-jerk reaction to the RBI’s steps, and I think within a week or so things should settle down, when the market would have a clearer perspective of how liquidity will be,” said N.S. Venkatesh, the Mumbai-based head of treasury at IDBI Bank Ltd.

The yield on the 8.15 percent bonds due June 2022 fell three basis points to 8.16 percent, after surging 52 basis points yesterday, the biggest yield increase for a benchmark 10-year security since January 2009, according to the central bank’s trading system. The yield on the 7.16 percent 2023 note, which fell two basis points today to 8.05 percent after the bill-sale results, is likely to drop as low as 7.90 percent in around 10 days, Venkatesh predicts.

Special Repo

The RBI will conduct special three-day repos from tomorrow to add as much as 250 billion rupees at 10.25 percent so banks can meet the liquidity needs of mutual funds, the monetary authority said in a statement today. The facility will be temporary, it added.

India’s government has proposed easing foreign-direct investment limits in some industries as part of measures to draw capital inflows and revive economic growth. Among the decisions taken at a meeting led by Prime Minister Manmohan Singh was a plan to allow overseas investors to own all of a phone carrier, Commerce Minister Anand Sharma told reporters yesterday. The changes would also permit foreign investment in defense production exceeding the current 26 percent cap if India gains access to modern technology.

“The measures are good in the long term, but may not provide any dollars in the short term,” said Samiran Chakraborty, an economist at Standard Chartered Plc in Mumbai.

Three-month onshore rupee forwards fell 0.5 percent to 60.75 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts dropped 0.6 percent to 60.73. 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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