India’s Rupee Weakens as Inflation Spurs Rate-Rise Speculation

India’s rupee fell for a third day on speculation resurgent inflation will force the central bank to boost borrowing costs, setting back efforts to arrest an economic slowdown. Interest-rate swaps climbed.

Wholesale prices rose 6.46 percent in September, the most in seven months, and consumer-price gains quickened to 9.84 percent, official data showed Oct. 14. The Reserve Bank of India will boost the benchmark repurchase rate by 25 basis points on Oct. 29 after raising it to 7.5 percent from 7.25 percent last month, according to FirstRand Ltd. The RBI is said to be considering closing a dollar-swap window for oil refiners.

“There are now more calls for a rate hike as inflation readings have not been comfortable,” said Paresh Nayar, head of currency and money markets at FirstRand in Mumbai. “Bond markets too are a bit nervous” as rupee weakness raises questions on whether the RBI will reverse liquidity-tightening measures it took to support the currency, he said.

The rupee weakened 0.4 percent to 61.7663 per dollar as of 9:46 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, increased two basis points to 8.46 percent, data compiled by Bloomberg show.

India’s economy expanded 5 percent in the year through March, the least in a decade, official data show.

The 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.

Currency Risk

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 Oct. 18. A central bank facility offering concessional swaps for foreign currency raised by banks is also set to close on Nov. 30.

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.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 11 basis points, or 0.11 percentage point, to 12.79 percent.

The yield on the 7.16 percent government bonds due May 2023 was little changed at 8.6 percent, according to prices from the central bank’s trading system. The rate climbed six basis points last week.

Forwards Fall

Ten-year notes fell in each of the last four months, the longest run of losses since 2009, as the RBI raised rates and curbed funding support to banks to stem a slide in the rupee. The currency has rebounded from a record low of 68.845 per dollar on Aug. 28, allowing the central bank to scale back some of the measures. Rajan twice cut two rates at which the RBI supplies cash to lenders in the past month.

Three-month onshore rupee forwards fell 0.4 percent to 63.17 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts declined 0.4 percent to 63.26. 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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