Indian Rupee Declines for a Second Week on Interest-Rate Outlook

India’s rupee dropped for a second week on concern faster inflation will prompt the central bank to boost borrowing costs, putting at risk an economy that’s growing at the slowest pace in a decade.

The Reserve Bank of India will increase its benchmark repurchase rate to 7.75 percent from 7.50 percent at an Oct. 29 review, according to 20 of 24 economists in a Bloomberg survey. One predicts an increase to 8 percent and three see no change. Governor Raghuram Rajan may raise his inflation forecast for the year through March 2014 to above 6 percent from “around 5 percent,” and scale back its economic-growth estimate to 5 percent from 5.5 percent, according to DBS Bank Ltd.

The rupee fell 0.3 percent from a week ago to 61.46 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It was steady today.

“The focus will entirely be on the RBI policy review,” Radhika Rao, an economist at DBS Bank in Singapore, wrote in a research report today. “Affirming the governor’s stance as an inflation hawk, the vote could swing to a 25 basis point hike in the repo rate. The new approach is likely to be focused primarily on price stability.”

One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, fell 138 basis points, or 1.38 percentage points, from Oct. 18 to 11.63 percent, according to data compiled by Bloomberg. The rate rose five basis points today.

Dollar Demand

The rupee also fell this week amid speculation the RBI is looking at ending an emergency facility under which it has directly sold dollars to state refiners since late August, a move that would increase demand for the greenback in the spot market.

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 on its website.

“The possibility that the oil swap window could be unwound might add buoyancy to the dollar against the rupee,” Rao at DBS wrote in the report.

The rupee ended little changed from yesterday, erasing losses of as much as 0.5 percent, as two officials with direct knowledge of the matter said the central bank’s offer of to swap dollars raised by banks at concession rates will attract about $15 billion before it ended next month.

The amount would exceed both the RBI’s and the government’s earlier expectations, the officials said, asking not to be identified as the projections are private.

Three-month onshore rupee forwards slipped 0.2 percent today to 62.96 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts weakened 0.1 percent to 62.96. 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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