India’s Rupee Volatility at Seven-Week Low on Inflow Optimism

Volatility in India’s rupee fell to a seven-week low on speculation global funds will add to purchases of the nation’s stocks after the central bank unexpectedly left borrowing costs unchanged last week.

Overseas investors bought $2.2 billion more of local shares than they sold this month, taking the year’s inflow to $19.7 billion, exchange data show. The Reserve Bank of India left its repurchase rate at 7.75 percent on Dec. 18, a move predicted by only five of 31 economists surveyed by Bloomberg. The rest had forecast an increase to 8 percent.

“Strong foreign institutional investor inflows into the domestic equity market are likely to keep pressure on the dollar,” analysts at Edelweiss Financial Advisors Ltd., including Vinay Khattar in Mumbai, wrote in a research report today. A “lack of cues from the overseas currency markets due to the year-end Christmas holidays and month-end dollar demand from local oil firms might keep upside limited for rupee.”

One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell 12 basis points, or 0.12 percentage point, to 10.59 percent in Mumbai, according to data compiled by Bloomberg. The rate touched 10.4825 percent earlier, the lowest since Nov. 4.

The rupee rose 0.1 percent to 61.96 per dollar, according to prices from local banks compiled by Bloomberg. It has rebounded 11.1 percent from a record low touched Aug. 28, paring its decline for the year to 11.3 percent.

‘Moderate Changes’

The Federal Reserve said Dec. 18 it will cut monthly bond purchases to $75 billion in January from $85 billion amid an improved outlook for the U.S. job market. The rupee is expected to remain stable, Finance Minister Palaniappan Chidambaram said in New Delhi Dec. 19. Markets aren’t likely to be surprised by the Fed’s “moderate changes” and India is better prepared to deal with any consequences of the tapering, he added in an e-mailed statement the same day.

Three-month offshore non-deliverable forwards rose 0.2 percent to 63.23 per dollar, according to data compiled by Bloomberg. 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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