India’s Rupee Weakens Before RBI, Fed Monetary Policy Reviews

India’s rupee dropped before a central bank meeting, with economists predicting an increase in borrowing costs for the second time in as many months.

The Reserve Bank of India tomorrow will raise the benchmark repurchase rate to 7.75 percent from 7.50 percent, according to 23 of 30 economists in a Bloomberg survey. One forecasts a move to 8 percent and six no change. Barclays Plc sees rates on hold, which will help boost growth in Asia’s third-largest economy and spur equity inflows.

“The RBI’s October meeting may provide some support to the rupee,” analysts at Barclays, including Singapore-based Hamish Pepper, wrote in a research report yesterday. “But we acknowledge the risk of one more repo-rate hike given the new RBI governor’s preference to convey a stern inflation-fighting message.”

The rupee fell 0.1 percent to 61.5250 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, dropped 29 basis points, or 0.29 percentage point, to 11.39 percent.

India’s inflation is high and above the central bank’s comfort level, the RBI said in a macroeconomic review published after the markets shut today.

The currency strengthened 1.8 percent this month after the Federal Reserve unexpectedly refrained from paring stimulus that’s boosted demand for emerging-market assets. The Fed is likely to delay lowering its monthly bond purchases until March, according to a Bloomberg News survey of economists conducted Oct. 17-18. The Federal Open Market Committee starts a two-day meeting tomorrow, the first since a 16-day government shutdown took at least $24 billion out of the U.S. economy.

Slowest Pace

India’s gross domestic product rose 5 percent in the year ended March 2013, the slowest pace in a decade. Wholesale price inflation accelerated to a seven-month high of 6.46 percent in September and consumer prices rose 9.84 percent, official data show.

“Monetary policy faces an unenviable task of anchoring inflation expectations, amid tepid growth and weak business confidence,” the RBI said in the macroeconomic review. “It is, therefore, important to craft policy responses so that growth concerns are addressed in an environment of stable prices.”

Three-month onshore rupee forwards rose 0.2 percent to 62.86 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts were steady at 62.95. 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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