India’s Rupee Has Worst Week in Two Years on Outflow Concerns

India’s rupee completed its biggest weekly loss in almost two years after the central bank said steps taken to boost the currency are temporary amid concern a possible paring of U.S. stimulus will intensify outflows.

The currency snapped a three-week gain as U.S. data indicated yesterday that manufacturing rose in July at the fastest pace in two years and applications for unemployment insurance payments fell last week to the lowest since January 2008. The Federal Reserve, which signaled in May it may taper its stimulus, said July 31 it would maintain the pace. The Reserve Bank of India this week lowered its growth forecast for the year through March 2014 to 5.5 percent from 5.7 percent, and Goldman Sachs Group Inc. cut its rating on Indian shares to underweight the next day.

“Near-term rupee stability remains a challenge,” Siddharth Mathur, a strategist at Citigroup Inc. in Singapore, wrote in a research report today. “We expect flows may still fall short of the approximately $6 billion per month of non-FDI capital flows needed to offset the current-account deficit,” he wrote, referring to foreign direct investment.

The rupee fell 3.4 percent this week to 61.0950 per dollar in Mumbai, the biggest drop since the five days through Sept. 23, 2011, according to prices from local banks compiled by Bloomberg. The currency, which plunged to a record 61.2125 on July 8, declined 1.1 percent today. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 15 basis points, or 0.15 percentage point, to 13.1 percent.

Current-Account Deficit

Overseas investors pulled $3 billion from Indian stocks and bonds last month on concern the Fed will pare stimulus as the world’s largest economy improves. This leaves the rupee more vulnerable to a current-account deficit that widened to an unprecedented 4.8 percent of gross domestic product in the year ended March 31.

The RBI yesterday tightened currency hedging rules for foreigners, following steps last month to curb trading in derivatives and to restrict cash supply. The monetary authority on July 30 kept its benchmark repurchase rate at 7.25 percent and said the liquidity measures will be rolled back once the currency stabilizes, enabling policy to focus on supporting growth.

Money managers who have issued the so-called participatory notes to investors or hedge funds not registered in India need to provide a mandate from them stating an intention to hedge, the RBI said on its website yesterday. Banks in India executing currency trades on behalf of overseas funds must verify such mandates, the RBI said.

“We believe the fundamental setup is still inclined toward a bearish rupee but given that authorities have swung into action we recommend staying on the sidelines for now,” Citigroup’s Mathur wrote.

Three-month onshore rupee forwards fell 1 percent from yesterday to 62.30 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts declined 1.2 percent to 62.58. 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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