Rupee Gains For a Second Week on Speculation RBI Sold Dollars

India’s rupee completed its second weekly gain, reversing earlier losses, on speculation the central bank sold dollars.

The Reserve Bank of India probably intervened to arrest the rupee’s slide, said two traders with knowledge of the matter, asking not to be named as the information isn’t public. The rupee had weakened as much as 0.3 percent earlier today on concern that potential paring of U.S. monetary stimulus will quicken outflows from Asia’s third-largest economy, leaving the currency more vulnerable to a record current-account deficit.

“Foreign-exchange intervention by the RBI in the current environment may yield some knee-jerk benefits such as cleaning the speculative positioning in rupee further, or establishing a range for the currency,” analysts at Barclays Plc, including Mumbai-based Siddhartha Sanyal, wrote in a research report today.

The rupee advanced 0.5 percent this week to 59.35 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. The currency, which rose 0.6 percent today, touched a record low of 61.2125 on July 8 before rebounding as the Reserve Bank of India announced measures to curb speculation and boost returns on local-currency assets.

The RBI intervenes to smooth excess volatility as well as to prevent disruptions to macroeconomic stability, Governor Duvvuri Subbarao reiterated in a speech in London on July 17.

Volatility Concerns

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 56 basis points, or 0.56 percentage point, today to 11.77 percent. The rate had touched 13.55 percent on July 8, the highest level since May 2012.

Volatility in the rupee is the “immediate cause of worry” as the government seeks to revive economic growth from the slowest pace in a decade, Prime Minister Manmohan Singh told businessmen today.

In testimony over the past two days, Federal Reserve Chairman Ben S. Bernanke sought to reassure investors that even as the central bank considers a reduction in asset purchases, it has not changed its highly accommodative policy. Global funds have cut holdings of Indian debt by about $8.6 billion since May 22, when Bernanke first flagged the tapering of stimulus.

RBI Actions

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 has also started capping the amount it lends to commercial banks through the daily repurchase window to around 750 billion rupees ($12.5 billion).

The RBI last week barred lenders from proprietary trading in currency futures and exchange-traded options, and the Securities and Exchange Board of India raised margin requirements and said it will limit open positions in such contracts.

Three-month onshore rupee forwards weakened 0.3 percent to 60.90 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts rose 0.3 percent to 60.63. 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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