Indian Rupee Drops a Second Day After RBI Raises Benchmark Rate

India’s rupee fell for a second day after the central bank unexpectedly raised interest rates and scaled back earlier measures meant to support the currency.

The Reserve Bank of India boosted its benchmark repurchase rate to 7.50 percent from 7.25 percent at a Sept. 20 review. It was the first increase since 2011, while all 36 economists in a Bloomberg survey predicted no change. The move will “arm” Governor Raghuram Rajan against the inevitable paring of U.S. stimulus, according to Andhra Bank.

“In the short term, the hike disappointed market hopes, and we are also seeing importers bidding for dollars today,” said Vikas Babu, a trader at state-run Andhra Bank in Mumbai. “In the longer run, the rate hike is a positive as a lowering of rates would have rendered India vulnerable when the tapering actually begins.”

The rupee weakened 0.5 percent to 62.5975 per dollar in Mumbai, adding to a 0.8 percent loss on Sept. 20, according to prices from local banks compiled by Bloomberg. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 103 basis points, or 1.03 percentage point, to 16.41 percent.

India’s gross domestic product increased 5 percent in the year ended March 31, the slowest pace since 2003, official data show. The RBI raised its main rate even after Federal Reserve Chairman Ben S. Bernanke said Sept. 18 he wants to see more evidence of a recovery in the U.S. economy before tapering monthly bond purchases of $85 billion.

‘Right Thing’

RBI Governor Rajan also cut the marginal standing facility rate to 9.5 percent from 10.25 percent and relaxed some curbs on cash supply put in place by his predecessor Duvvuri Subbarao. Rajan “did the right thing,” Bhanu Baweja, head of emerging-markets cross-asset strategy at UBS AG in London, said in an interview with Bloomberg TV India, telecast today.

Three-month onshore rupee forwards fell 0.7 percent to 64.12 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts dropped 0.1 percent to 64.38. 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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