Rupee Volatility Drops on Gold Curbs, U.S. Stimulus Optimism

Volatility in India’s rupee fell to the lowest level in more than a month after the central bank tightened restrictions on gold imports to curb the current-account deficit and as an unexpected decline in U.S. home sales eased concern the Federal Reserve will trim stimulus.

Demand for the metal rises in August through November as Indian consumers buy gold products for gifts during the festival season. At least 20 percent of every lot of imported gold must be made available for export, the Reserve Bank of India said in a statement yesterday. Sales of previously owned U.S. homes dropped 1.2 percent in June, bolstering the case for the Fed to maintain stimulus that drove demand for emerging-market assets. The spot rupee reversed earlier gains.

The gold curbs will have only a “muted” impact on India’s current-account gap as oil prices are rising, said Andy Ji, a strategist at Commonwealth Bank of Australia in Singapore. Bouts of rupee-strength “will not be significant and sustained,” he said.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 50 basis points, or 0.50 percentage point, to 10.91 percent, the lowest closing level since June 17, according to data compiled by Bloomberg. The rupee declined 0.1 percent in the spot market to 59.7650 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. The currency dropped to a record 61.2125 on July 8.

The shortfall in the current account, the broadest measure of trade, widened to an unprecedented 4.8 percent of gross domestic product in the year ended March 31, official data show.

Gold Shortage

The gold-import measures will cause a shortage of the metal during the festival season, according to the All India Gems & Jewellery Trade Federation, which estimates annual gold-product exports at 70 metric tons.

“It’s like a ban,” Bachhraj Bamalwa, a director at the federation, said in an interview. “Nobody will import gold with this kind of restrictions.”

Brent crude prices climbed 6 percent this month after rising 1.8 percent in June, according to data compiled by Bloomberg. India ships in about 80 percent of its oil and is the world’s largest consumer of gold.

India met its target yesterday to sell foreign investors permits giving them the right to purchase 236.6 billion rupees ($4 billion) of local-currency sovereign bonds. Global funds cut holdings of the notes on all but two days since Fed Chairman Ben S. Bernanke first signaled a potential paring of stimulus May 22.

Three-month onshore rupee forwards weakened 0.4 percent to 61.04 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts fell 0.4 percent to 60.97. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

Before it's here, it's on the Bloomberg Terminal.