Rupee Drops for a Third Day After State Bank of India Downgrade

India’s rupee fell for a third day, the longest losing streak in almost a month, after Moody’s Investors Service downgraded the nation’s largest lender.

State Bank of India’s debt rating was cut to Baa3 from Baa2 yesterday by Moody’s, which also changed the outlook on the D+ financial strength ranking to negative from stable, citing a slowdown in the economy and the need for a capital injection from the government. Credit-default swaps insuring SBI bonds against non-payment for five years climbed 20 basis points yesterday, the most since Aug. 19, to 282, CMA prices show.

“The SBI downgrade may affect India through the equity channel as outflows will affect the rupee,” said Vishnu Varathan, an economist at Mizuho Bank Ltd. in Singapore. “Some investors also perceive porous linkages between SBI and the sovereign,” renewing concern that India’s credit rating may be downgraded, he said.

The rupee weakened 0.3 percent to 62.77 per dollar in Mumbai, 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 15 basis points, or 0.15 percentage point, to 16.26 percent.

Standard & Poor’s reiterated on Sept. 3 it sees more than a one-in-three chance that India’s debt rating will be cut within two years.

The central bank unexpectedly raised benchmark interest rates on Sept. 20 and scaled back earlier measures meant to support the currency, which plunged 12.4 percent this year, Asia’s second-worst performance after the Indonesian rupiah. The rupee reached a record low of 68.845 per dollar on Aug. 28.

Three-month onshore rupee forwards fell 0.5 percent to 64.42 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts dropped 0.2 percent to 64.75. 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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