India’s Rupee, Bond Volatility at 2009 High on Fed Stimulus Risk

Historical volatility on India’s rupee and bonds rose to 2009 highs this week on concern the U.S. will pare stimulus, intensifying debt outflows and leaving the currency vulnerable to a current-account deficit.

The rupee fell to a record low of 61.8050 per dollar on Aug. 6 as Federal Reserve officials signaled that cuts to asset purchases are possible in September as the U.S. economic outlook improves. Raghuram Rajan, who will take charge of India’s central bank when Governor Duvvuri Subbarao’s term ends next month, said Aug. 6 that more measures will be taken soon to stabilize the currency. Finance Minister Palaniappan Chidambaram will talk on rupee steps at the end of this week, Economic Affairs Secretary Arvind Mayaram said in Mumbai today.

“Supplies of the dollar are constrained,” said Paresh Nayar, head of currencies and money markets at FirstRand Ltd. in Mumbai. “The rupee is under pressure due to foreign-investor outflows and demand for dollars from oil importers.”

The rupee’s three-month historical volatility rose five basis points to 11.94 percent, the highest level since February 2009, data compiled by Bloomberg show. Fifty-day historical volatility for the 10-year benchmark sovereign bond touched 22 percent yesterday, the most since June 2009. Indian markets are shut tomorrow for a public holiday.

The rupee rebounded today on speculation the RBI sold dollars, according to two traders with knowledge of the matter, who asked not to be named as the information isn’t public.

The currency climbed 0.7 percent to 60.8600 per dollar in Mumbai, after plunging 0.8 percent yesterday, according to prices from local banks compiled by Bloomberg.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 38 basis points, or 0.38 percentage point, to 12.40 percent today.

Yields Fall

Global funds have cut holdings of Indian debt by $9.5 billion since May 22, when Fed Chairman Ben S. Bernanke first signaled a potential tapering. India’s current-account deficit widened to an unprecedented 4.8 percent of gross domestic product in the year ended March 31, official data show.

The yield on the 7.16 percent government bonds due May 2023 fell two basis points to 8.13 percent, according to prices from the central bank’s trading system. The yield has dropped 16 basis points this week. India sold 150 billion rupees of bonds today as planned, the first successful weekly sale since July 12. Primary dealers had bought part of the notes offered at auctions held on July 19, July 26 and Aug. 2.

Fed Bank of Chicago President Charles Evans, among the strongest proponents of the monetary accommodation in the U.S., said Aug. 6 that he “would clearly not” rule out a decision to begin curbing asset purchases in September. Dallas Fed President Richard Fisher said Aug. 5 the central bank is closer to slowing $85 billion in monthly bond buying and warned investors not to rely on that stimulus.

Three-month onshore rupee forwards rose 0.5 percent to 62.30 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts gained 0.6 percent to 62.39. 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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