Indian Rupee Volatility Declines to Two-Month Low on Fed Outlook

Volatility in India’s rupee fell to a two-month low on speculation a U.S. budget impasse that weighed on the world’s largest economy will prompt the Federal Reserve to prolong stimulus that’s buoyed emerging markets.

Congress voted yesterday to halt a 16-day government shutdown and avert a debt default. BlackRock Inc. and Pacific Investment Management Co. said the Fed will postpone tapering its bond purchases after the fiscal standoff. Global funds bought a net $1.2 billion of Indian stocks this month through Oct. 17, exchange data show, in a sign of improving confidence in the rupee after the Reserve Bank of India stepped up efforts since the start of September to boost dollar supply.

“The pushing out to next year of U.S. tapering and U.S. fiscal concerns has allowed risk-taking behavior across emerging-market foreign exchange,” strategists at Morgan Stanley, including London-based Hans Redeker, wrote in a research report yesterday. “We’re tactically bullish on the rupee as the RBI’s efforts on improving the balance of payments seem to be working.”

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 178 basis points, or 1.78 percentage points, this week to 12.97 percent, according to data compiled by Bloomberg.

The central bank is looking at ending an emergency facility under which it has directly sold dollars to state refiners since late August, according to three people with knowledge of the matter. The facility stays operational and “any tapering of the window, as and when it occurs, will be done in a calibrated manner,” the RBI said in a statement on its website today.

The rupee reversed gains, sliding as much as 0.8 percent to 61.71 a dollar before ending the day at 61.265 versus 61.22 yesterday, according to prices from local banks compiled by Bloomberg. It fell 0.3 percent this week.

Fed Outlook

The U.S. “fiscal shenanigans” undermined the case for tapering the Fed’s $85 billion in monthly bond buying, Dallas Fed President Richard Fisher said yesterday.

Standard & Poor’s said suspending government operations would shave at least 0.6 percent from fourth-quarter U.S. gross domestic product growth, taking $24 billion out of the economy. The Fed shouldn’t begin reducing bond purchases because, during the shutdown, the government halted data used to gauge the economy’s health, Chicago Fed President Charles Evans, an outspoken advocate of greater stimulus, said yesterday.

Three-month onshore rupee forwards rose 0.3 percent today to 62.62 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts were little changed at 62.70. 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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