Indian Rupee, Stocks Diverge as RBI Intervenes: Chart of the Day

Indian stocks and the rupee are diverging by the most in a year amid efforts by the central bank to restrain the currency even as equities surged to a record following the nation’s most decisive election in 30 years.

The CHART OF THE DAY tracks the rupee and benchmark S&P BSE Sensex index in the upper panel. The middle graph shows that the 120-day correlation between the currency and equities gauge fell below 0.36 on June 12 for the first time in a year, and is nearing levels not seen since the collapse of Lehman Brothers Holdings Inc. in September 2008. A reading of 1 would indicate the two assets are in lockstep, while zero would represent no relationship. The lower panel shows India’s foreign-currency assets, based on Reserve Bank of India data.

“The correlation can stay low as the RBI will continue to intervene in the rupee market to build forex reserves,” Bhanu Baweja, the head of emerging-market cross-asset strategy at UBS AG in London, said by e-mail last week. “The central bank wants to prepare for a round two of capital flight from emerging markets if U.S. yields rise, as they probably will. It makes sense to curb rupee volatility, especially in the context of India’s elevated external debt.”

RBI Governor Raghuram Rajan has boosted the currency stockpile about 16 percent since September, to $286 billion, to help cushion India from potential fund outflows as the U.S. Federal Reserve tapers its quantitative easing. Rajan said in April that Asia’s third-largest economy is now prepared for potential fallout should the Fed raise rates in the coming year.

The Bharatiya Janata Party, led by Narendra Modi, garnered India’s first single-party majority since 1984, election results showed May 16. Global funds have since boosted holdings of Indian stocks by about $3 billion on optimism a stable government will take steps to boost economic growth, triggering a 5.4 percent rally in the Sensex. The rupee has weakened 1.5 percent against the dollar in the period.

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