India Rupee Gains, Bonds Plunge After RBI Further Tightens Cash

India’s rupee rose the most this month and bond yields surged to the highest level in more than a year after the monetary authority restricted banks’ access to cash to arrest the currency’s slide.

The Reserve Bank of India capped the amount lenders can borrow in daily repurchase auctions at 0.5 percent of deposits, it said in a statement yesterday, sending the benchmark money rate to a 16-month high. The RBI also raised the daily balance requirement for lenders’ cash-reserve ratios to 99 percent from 70 percent effective July 27, while separately announcing an auction of 60 billion rupees of cash-management bills tomorrow.

“Money-market rates have spiked and it’s anyone’s guess how this will play out on growth and the markets,” said Paresh Nayar, head of currency and money markets at the Indian unit of FirstRand Ltd. in Mumbai. “Demand for dollars in the currency market is intact” due to the current-account deficit, he said.

The rupee advanced 1.1 percent to 59.13 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. The currency, which dropped to a record 61.2125 on July 8, weakened 8 percent in the past three months on concern the U.S. will pare stimulus that drove demand for emerging-market assets.

The yield on the 7.16 percent bonds due May 2023 rose 25 basis points, or 0.25 percentage point, to 8.42 percent, according to prices from the central bank’s trading system. That’s the highest for a benchmark 10-year note since May 2012. The overnight interbank call money rate rose 50 basis points to 7 percent after earlier touching 10.10 percent, the highest level since March 2012.

Rupee Vulnerable

Global funds have cut holdings of Indian debt by $8.8 billion since May 22, when Federal Reserve Chairman Ben S. Bernanke first signaled the central bank may curb bond buying. The outflows leave the rupee vulnerable to a current-account shortfall that widened to an unprecedented 4.8 percent of gross domestic product in the year ended March 31.

To limit the rupee’s drop, which threatens to stoke inflation in a nation that imports 80 percent of its oil, the RBI on July 15 raised two interest rates and moved to drain money through bond sales. The central bank kept its main repurchase rate unchanged at 7.25 percent as the economy grows at the slowest pace in a decade.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 32 basis points to 11.23 percent, according to data compiled by Bloomberg.

‘Muddled’ Message

While Deutsche Bank AG is “confident” the RBI’s steps will lower volatility and result in a stronger rupee, the measures reflect the central bank’s “desperation” and the message is somewhat “muddled,” Singapore-based economist Taimur Baig wrote in a report yesterday.

“By not raising the repo rate and insisting that these measures are temporary, the RBI has tried to signal it is not tightening monetary policy, but at the same time it seems keen to make liquidity costly,” Baig wrote. “Adding policy uncertainty and confusion to the mix could chill investor sentiment even further.”

The new rules on the daily repo auctions will cap banks’ total borrowing at 386 billion rupees ($6.5 billion), Yes Bank Ltd. estimates. The limit supersedes previous rules announced July 15, when the RBI put a ceiling on the borrowing facility at 750 billion rupees.

Three-month onshore rupee forwards rose 0.8 percent to 60.58 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts gained 0.9 percent to 60.41. 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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