India Rupee Drops Most in Two Weeks as Fed Meets; Swaps Decline

India’s rupee fell the most in two weeks as the Federal Open Market Committee starts a meeting today to decide whether to taper stimulus that has driven demand for emerging-market assets. Interest-rate swaps dropped.

The Fed will probably trim its monthly debt-buying program by $10 billion to $75 billion this week, a Bloomberg survey of economists showed this month. Overseas funds have reduced holdings of Indian notes by $10.6 billion since May 22, when Fed Chairman Ben Bernanke first flagged a potential paring of asset purchases. The Reserve Bank of India will review policy Sept. 20 after data yesterday showed wholesale prices unexpectedly accelerated to a six-month high in August from a year earlier.

The rupee slid 0.8 percent to 63.37 per dollar in Mumbai, the most since Sept. 3, according to prices from local banks compiled by Bloomberg. The currency, which touched the strongest level in almost a month yesterday, has rallied 3.7 percent in September.

“Nobody really wants to take a view ahead of the Fed and RBI decisions,” said Vivek Chaturvedi, associate vice president for foreign exchange and derivatives at Ratnakar Bank Ltd. in Mumbai. “The rupee is in a delicate balance” after the recent gains, he said.

India’s one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, slid three basis points to 9.19 percent, data compiled by Bloomberg show. The yield on the 7.16 percent sovereign notes due May 2023 was at 8.44 percent from 8.43 percent yesterday, which was the lowest since Sept. 5, according to the central bank’s trading system.

Borrowing Target

India is said to keep its gross borrowing goal of 6.29 trillion rupees for the year ending March 2014, according to two finance ministry officials with direct knowledge of the matter. The government will announce the borrowing calendar on Sept. 23, the officials said on the condition of anonymity as the details aren’t public yet.

The rupee gained by the most since October 2009 last week on optimism steps announced by the new RBI governor will boost the supply of dollars. In his first speech upon taking office on Sept. 4, Raghuram Rajan offered to sell concessional swaps for lenders’ foreign-currency deposits and vowed to curb inflation. The steps will boost India’s reserves by $10 billion, Bank of America Merrill Lynch estimates.

Rajan took charge after the central bank, under his predecessor Duvvuri Subbarao, raised two interest rates in July to increase shorter-term borrowing costs and capped cash injections into the banking system among a series of measures by policy makers to stem the currency’s slide.

Rupee Risk

The “rupee remains at risk on poor data, external developments,” Amit Agrawal, an analyst at Societe Generale SA in Bangalore, wrote in a research report today. “We believe that the backdrop for global emerging markets continues to be quite challenging.”

The rupee’s one-month implied volatility, a measure of expected moves in the exchange rate used to price options, surged 118 basis points to 18.68 percent, the biggest jump since Aug. 28 when the currency hit a record low of 68.845 a dollar.

Three-month onshore rupee forwards dropped 0.4 percent to 64.67 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts slid 0.7 percent to 65.10. 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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