India’s Rupee Completes Worst Week in a Month on Inflow Concern

India’s rupee completed its first weekly drop in a month on concern importers will step up dollar purchases amid slowing inflows as the U.S. pares stimulus.

Global funds sold a net $6 million of Indian shares this year, exchange data show, as minutes of the Federal Reserve’s January meeting published this week showed several policy makers support a plan to continue trimming bond purchases. Indian oil refiners will, by the end of May, repay dollars borrowed under an emergency facility from the central bank, according to an official with direct knowledge of the matter.

“The risk to the dollar-rupee shooting back up short term continues to lie with U.S. data improving,” Leong Sook Mei, an analyst at Bank of Tokyo-Mitsubishi UFJ Ltd. in Singapore, wrote in a research report yesterday. “Aside from vulnerability from portfolio flows, the government has been in the process of unwinding support measures.”

The rupee dropped 0.3 percent this week to 62.13 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It gained 0.2 percent today. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 23 basis points, or 0.23 percentage point, from Feb. 14 to 8.19 percent.

IMF Advice

India should prepare to respond to volatility in global currency markets that may come as the Fed cuts stimulus, International Monetary Fund staff said in a report yesterday. Any plan should make rupee flexibility the key defense and include measures to raise the benchmark interest rate, impose cash curbs, open foreign-exchange swap windows and raise diesel prices, it said in an annual review of the nation’s economy.

Meanwhile, Goldman Sachs Asset Management and William Blair Investment Management are buying the rupee as India reins in a current-account deficit that drove the currency to a record low of 68.845 per dollar in August. Policy makers had imposed curbs on gold imports, offered swaps to refiners and banks, and curtailed options trading.

Bank of Tokyo-Mitsubishi estimates the oil swap repayments will add up to $18 billion. The Reserve Bank of India sees no need to roll over the contracts, according to the official, who asked not to be identified as the decision is not yet public.

Several U.S. policy makers said that, in “the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor” of continuing to trim the Fed’s bond purchases by $10 billion at each meeting, according to the minutes released Feb. 19. The central bank has cut the stimulus to $65 billion from $85 billion this year.

Three-month offshore non-deliverable forwards rose 0.4 percent today to 63.24 per dollar, data compiled by Bloomberg show. 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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