India’s Rupee Drops a Second Day on Inflation, Inflow Concerns

India’s rupee fell for a second day on concern resurgent inflation will compel the central bank to boost borrowing costs, even with growth near a decade low.

Wholesale prices unexpectedly rose 6.46 percent in September, the fastest in seven months, official data showed last week. Consumer prices climbed 9.84 percent. The Reserve Bank of India will boost the benchmark repurchase rate at a review on Oct. 29 after increasing it to 7.50 percent from 7.25 percent last month, according to HDFC Bank Ltd. The central bank is said to consider closing a dollar-swap window for oil refiners, while a facility offering concessional swaps for foreign currency raised by banks is scheduled to close Nov. 30.

“Inflation concerns will be primary,” said Ashtosh Raina, head of foreign exchange at HDFC Bank in Mumbai. “There is also concern about dollar supplies as the swap window for banks expires next month and oil demand could also come into the market.”

The rupee weakened 0.4 percent to 61.5225 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 33 basis points, or 0.33 percentage point, to 12.68 percent.

Swap Windows

India’s central bank is looking at ending the 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 RBI is in talks with the companies to gauge the potential impact of withdrawing the measure on the exchange rate, two of the people said, asking not to be named as the discussions are private. 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 an Oct. 18 statement.

The removal of the measures “poses a risk for the currency and highlights the need for further interest-rate adjustment,” analysts at Morgan Stanley, including New York-based Rashique Rahman, wrote in an Oct. 18 research report.

Three-month onshore rupee forwards fell 0.5 percent to 62.92 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts declined 0.4 percent to 63. 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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