Indian Rupee, Bonds, Stocks Advance on RBI Swap Plans

India’s rupee jumped after the new central bank governor took steps to boost dollar supply and lawmakers moved closer to allowing foreign investment in pension funds. Stocks surged, while government bonds fell.

In his first briefing after taking office, Reserve Bank of India Governor Raghuram Rajan announced a plan yesterday to provide concessional swaps for banks’ foreign-currency deposits, a move that will boost the authority’s reserves by $10 billion, according to Bank of America Merrill Lynch. India’s lower house of parliament passed a bill yesterday allowing international holdings in the nation’s pension funds as the government tries to revive the economy and shore up the rupee.

Rajan “wasted no time in announcing measures that could potentially lead to an increase in the dollar reserves of the RBI and hence enable the RBI with more firepower,” economists at Kotak Mahindra Bank Ltd., led by Mumbai-based Indranil Pan, wrote in a report. “These measures are definitely positive as far as sentiment is concerned.”

The rupee climbed 1.5 percent to 66.1150 per dollar in Mumbai, the most in a week, prices compiled by Bloomberg from local banks show. It rose as much as 2.3 percent intraday. The currency, which sank to a record low of 68.845 on Aug. 28, has weakened 16.8 percent this year, the worst performance after the South African Rand among 24 emerging-market currencies tracked by Bloomberg.

The 30-stock S&P BSE Sensex rallied 2.2 percent, led by the biggest rally in lenders since May 2009, as Rajan outlined plans to bolster the financial industry. The yield on the 7.16 percent 10-year bonds due May 2023 slumped to as low as 8.17 percent before reversing losses toward the close of trade as yields on government notes from U.S. to Europe climbed, and as some investors booked profits, according to Mumbai-based Development Credit Bank Ltd.

Currency Swaps

The central bank plans to offer currency swaps to banks at

3.5 percent. That compares with market rates between 6 percent and 8 percent, according to Barclays Plc.

The pension funds bill caps overseas ownership in local ventures at 26 percent. The threshold for foreign direct investment in pensions will be kept in line with the cap for insurance, which was opened to overseas companies in 2000. The legislation now needs the approval of the upper house.

Rajan, who predicted the 2008 global financial crisis and has been appointed governor for three years, said after the close of markets yesterday that containing inflation expectations is the RBI’s key goal. The former International Monetary Fund chief economist faces the challenge of a weak currency and consumer inflation that’s running at almost 10 percent. India’s economy expanded 4.4 percent in the quarter ended June, the weakest pace since 2009.

‘Near-Term Positive’

Rajan replaced Duvvuri Subbarao, who in July took steps to restrict banks’ access to cash and began draining money through weekly bill sales in an attempt to push up short-term rates and support the rupee. Bond yields climbed in each of the past three months, the longest such run for benchmark 10-year debt since August 2010, data compiled by Bloomberg show. The surge in yields following the cash squeeze prompted the central bank to announce a plan to buy back long-dated debt.

The RBI yesterday clarified some restrictions on capital outflows implemented Aug. 14, giving companies more scope to invest abroad using overseas debt. The central bank also allowed businesses to borrow from foreign shareholders subject to conditions, according to statements on its website.

Allowing banks to swap foreign-currency deposits, “along with a few other measures, could attract $10 billion of forex inflows in the next three months and could be a material near-term positive for the rupee,” Barclays analysts including Mumbai-based Siddhartha Sanyal wrote in a report today. “A meaningful improvement in rupee sentiment would raise the likelihood of a rollback in September-October of some of the RBI’s recent liquidity-tightening measures.”

Stocks Rally

HDFC Bank Ltd., India’s biggest lender by market value, surged 8.1 percent, leading the biggest rally in the 13-member S&P BSE India Bankex in four years. Rajan plans to make it easier for banks to open branches and lend to non-state sectors of the economy, steps that JPMorgan Chase & Co. analysts say will have a “major long-term impact” on bank profits.

There’s a need to cut the requirement for banks to invest in government debt and ensure lending to productive sectors of the economy, Rajan said yesterday. The RBI will look at ways to improve the recovery mechanism for bad loans and propose a database for large loans across banks, he said.

“Rising bad loans are the biggest concern for investors, and if Rajan can tackle that, then it will be the biggest boost to lenders’ profits and sentiment,” Manish Sonthalia, a Mumbai-based money manager at Motilal Oswal Asset Management Co., said in an phone interview today.

Bond Yields

The yield on government notes maturing May 2023 rose three basis points, or 0.03 percentage point, from yesterday to 8.42 percent in Mumbai, according to prices from RBI’s trading system. U.S. five-year note yields and French 10-year yields advanced before monetary policy meetings in Europe and U.S. jobs data that may provide clues about Federal Reserve stimulus.

Indian bonds, which rose in four of the past five sessions, pared gains also on “profit booking as yield levels close to 8 percent are not sustainable in the current environment of high inflationary expectations amid rupee’s weakness,” Debendra Kumar Dash, a fixed-income trader at Development Credit Bank, said by phone.

One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, sank 35 basis points to 22.03 percent.

Three-month onshore rupee forwards jumped 1.3 percent to

67.61 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts advanced 1.4 percent to 68.19. 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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