India Rupee Sinks to Record, Bonds Slump on Fed Taper Concern

India’s rupee plunged to a record low on speculation a strengthening U.S. economy may prompt the Federal Reserve to pare its $85 billion monthly bond-buying program as early as next month. Bonds and stocks declined.

U.S. home sales probably climbed to a three-year high, data may show Aug. 21, the same day minutes of the Federal Open Market Committee’s July meeting are slated to be released. The Fed may taper its stimulus in September by $10 billion, according to the median estimate of economists in a survey concluded last week. The Bloomberg Dollar Index rose 0.5 percent in the week to Aug. 16 as U.S. jobless claims fell to their lowest level since 2007 and retail sales increased for a fourth month in July.

The rupee sank 2.3 percent to 63.1300 per dollar in Mumbai today, according to prices from local banks compiled by Bloomberg. That is the biggest decline since Sept. 22, 2011. The currency touched an unprecedented 63.2300 intraday.

“We continue to believe that tapering will begin at the September meeting and, hence, support the U.S. dollar, especially against high yielding currencies,” Barclays Plc analysts Sudakshina Unnikrishnan and Hamish Pepper wrote in an e-mailed report today. “Weakness in the rupee has been particularly pronounced following a continued sell-off in Indian government bonds.”

Global funds have cut holdings of Indian debt by $9.8 billion since May 22 when Fed Chairman Ben S. Bernanke first signaled the U.S. may reduce bond purchases this year. Foreign investors sold a net $3 billion of local stocks and bonds in July amid the slowest growth in a decade in Asia’s third-largest economy.

Bonds Slump

The yield on the 7.16 percent government bonds due May 2023 surged 34 basis points to 9.23 percent, according to prices from the central bank’s trading system. The rate, which surged 77 basis points last week, is at the highest level for a benchmark 10-year Indian bond since August 2008.

Primary dealers had to buy 14.44 billion rupees ($228 million) of the 160 billion rupees of debt offered to local investors on Aug. 16, the fourth failure among five weekly auctions since July 19, RBI data show.

Stocks plunged, with the benchmark S&P BSE Sensex losing 1.6 percent today to post its biggest two-day decline since February 2009. Indian equities have posted four weeks of losses on concern efforts by the central bank and the government to support the rupee will weigh on the nation’s economy.

One-month implied volatility for the rupee, a measure of expected moves in the exchange rate used to price options, surged 142 basis points, or 1.42 percentage point, to 14.14 percent today, the highest since May 2012, data compiled by Bloomberg show.

‘Losing Anchor’

The currency has weakened 28 percent in the past two years, the biggest tumble since the government pledged gold reserves in exchange for loans from the International Monetary Fund in 1991.

“The rupee is at the risk of completely losing its anchor,” Bhanu Baweja, the global head of emerging-market cross-asset strategy at UBS AG, said in an interview with Bloomberg TV India today. “You’re in a situation where no rupee forecast is sacrosanct.”

The Reserve Bank of India on Aug. 14 announced measures to limit foreign-currency outflows from local companies and residents, and boosted efforts to lure investment. India will seek to increase capital inflows with steps including allowing state-owned financial companies to issue “quasi-sovereign” bonds to finance long-term infrastructure investment, Finance Minister Palaniappan Chidambaram said Aug. 12.

This followed RBI’s efforts last month to stem currency depreciation through an increase in two interest rates and by draining liquidity from the banking system.

Three-month onshore rupee forwards slumped 1.6 percent today to 64.45 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts declined 0.8 percent to 64.60. 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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