India’s Rupee Drops as U.S. Stimulus Concerns Offset RBI Steps

India’s rupee fell, rebounding from a one-week high, as local policy makers’ steps to steady the currency were countered by concern a potential paring of U.S. stimulus will spur outflows. Bonds declined.

The Bloomberg Dollar Index rose before U.S. data tomorrow that is forecast to show retail sales increased for a fourth month, backing the case for the Federal Reserve to curb bond purchases. India will contain its current-account deficit to 3.7 percent of gross domestic product in the year through March 2014, Finance Minister Palaniappan Chidambaram said in parliament today. The central bank last week announced steps to further tighten cash supply.

“We still await the finer details to assess the real impact, but the government’s broad strategy throws up no surprises and is mildly disappointing, given the build-up of expectations,” Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai, wrote in a research report today. “The measures broadly fall in the category of quick-fix solutions and there is no detail on sustainably lowering the current-account deficit.”

The rupee weakened 0.7 percent to 61.2750 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. The currency, which plunged to a record 61.8050 on Aug. 6, touched 60.45 earlier today, its strongest since Aug. 1. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 18 basis points to 12.34 percent.

The Reserve Bank of India will auction 220 billion rupees ($3.6 billion) of cash-management bills every Monday, it said in a statement on Aug. 8. The nation’s financial markets were closed for a holiday on Aug. 9.

Bonds Drop

India’s consumer prices probably rose 9.71 percent in July from a year earlier, compared with 9.87 percent in June, according to the median of 20 estimates in a Bloomberg survey before data due today. Industrial production contracted 1.1 percent in June, according to the median of 32 forecasts in a separate survey.

“The sobering information about the dismal state of the economy will effectively be irrelevant for the central bank,” Vishnu Varathan, an economist at Mizuho Bank Ltd. in Singapore, wrote in a research note today. “The policy action required to resist further pressures on the rupee is at odds with policies required to help cushion the economy and help boost growth.”

The yield on the 7.16 percent government bonds due May 2023 rose 18 basis points to 8.30 percent, according to prices from the central bank’s trading system, the first increase since Aug. 2.

Cash-Supply Steps

The RBI today sold 110 billion rupees of cash management bills maturing Sept. 17, it said in a statement, and will auction the same amount of the notes tomorrow.

Finance Minister Chidambaram said investors’ concerns about the current-account gap, which widened to an unprecedented 4.8 percent of GDP in the year ended March 31, are reflecting on the rupee. To bridge the shortfall, India will allow state-run companies to sell quasi-sovereign bonds and make it easier for companies to borrow from abroad.

Three-month onshore rupee forwards fell 0.4 percent to 62.59 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts fell 1 percent to 62.51. 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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