India Rupee, Bonds Complete Weekly Drop on U.S. Stimulus Concern

India’s rupee and bonds completed the biggest weekly loss in more than two months on concern the U.S. will pare stimulus earlier than anticipated, damping demand for emerging-market assets.

Government data yesterday showed the world’s largest economy expanded at a faster pace than estimated last quarter. Another negative for the rupee is the Reserve Bank of India’s decision to cut direct dollar supplies to oil refiners, according to a research note by Credit Agricole CIB strategist Dariusz Kowalczyk. That pressures the currency as the nation runs a current-account deficit.

“India is definitely not one of the better fundamental countries,” Ilan Solot, a strategist at Brown Brothers Harriman & Co. in London, said yesterday. “In a period of risk aversion, the rupee is probably one of the top currencies to be sold.”

The rupee fell 1.2 percent this week to 62.4750 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It ended 0.1 percent lower from yesterday, paring an earlier 0.5 percent drop, with three traders saying the central bank probably sold dollars. They asked not to be named as the information isn’t public.

One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 248 basis points, or 2.48 percentage points, from Nov. 1 to 12.70 percent.

The yield on the 7.16 percent government bonds due May 2023 advanced 29 basis points this week to 8.99 percent, according to prices from the central bank’s trading system. The rate climbed 14 basis points today and is the highest for a 10-year benchmark bond since Aug. 19.

The Reserve Bank of India has reduced direct dollar supplies to oil refiners by 30 percent to 40 percent, Economic Affairs Secretary Arvind Mayaram told CNBC TV-18 yesterday.

Credit Rating

India’s credit rating may be cut to junk next year unless elections due by May lead to a government capable of reviving economic expansion, Standard & Poor’s said in a statement yesterday. S&P expects to review the rating in 2014 after assessing the next government’s plans and could demote the nation if “policy drift” continues, it said, while reaffirming India at BBB-, the lowest investment grade, with a negative outlook.

India auctioned 150 billion rupees of bonds maturing in 2019, 2023, 2032 and 2042 today. U.S. data is today projected to show the unemployment rate rose to 7.3 percent from 7.2 percent. The economy expanded at a 2.8 percent annualized rate last quarter, exceeding the median of economists’ forecasts for 2 percent growth.

Three-month onshore rupee forwards fell 0.1 percent to 64.10 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts dropped 0.2 percent to 64.41. 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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