India Rupee Nears Record Low, Bonds Drop on Fed Stimulus Concern

India’s rupee weakened to within 0.4 percent of its record low on concern steps taken by policy makers to steady the currency will prove insufficient as the U.S. prepares to pare stimulus. Government bonds fell.

The Bloomberg Dollar Index touched a one-week high before data forecast to show manufacturing in the New York region expanded at the fastest pace in six months and claims for U.S. jobless benefits declined. India’s government this week announced measures to contain a record current-account deficit by curbing imports and boosting capital inflows. The Reserve Bank of India began weekly sales of cash-management bills to further tighten liquidity and buoy the rupee.

The measures will be insufficient to “fix the leaks,” Leif Eskesen, an economist at HSBC Holdings Plc in Singapore, wrote in a research report today. “Ultimately structural reform implementation is the solution, but short term there is a need to rely on the RBI and more plumbing measures.”

The rupee fell 0.4 percent to 61.4450 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. The currency, which plunged to a record 61.805 on Aug. 6, touched 61.5750 earlier. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, dropped six basis points to 12.54 percent. India’s financial markets will be shut tomorrow for Independence Day.

Global funds have cut holdings of Indian debt by $10 billion since May 22 when Federal Reserve Chairman Ben S. Bernanke first signaled the U.S. may reduce bond purchases this year.

India Steps

India raised import duties on gold and platinum to 10 percent from 8 percent, while the levy on silver was increased to 10 percent from 6 percent, according to a Ministry of Finance notification tabled in parliament yesterday. The government will also seek to boost capital inflows with measures including allowing state-owned financial companies to issue “quasi-sovereign” bonds to finance long-term infrastructure investment, Finance Minister Palaniappan Chidambaram said Aug. 12.

Official data today showed wholesale prices rose 5.79 percent last month from a year earlier, compared with the 7 percent median estimate in a Bloomberg survey. The rate was 4.86 percent in June. A weaker rupee stokes inflation as India imports about 80 percent of its oil.

The yield on the 7.16 percent government bonds due May 2023 rose 10 basis points, or 0.10 percentage point, to 8.50 percent, according to prices from the central bank’s trading system. That’s the highest rate on a 10-year bond since May 2012.

Three-month onshore rupee forwards fell 0.3 percent to 62.87 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts fell 0.4 percent to 62.86. 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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