Rupee Completes Biggest Monthly Decline Since August on Oil Risk

Indian rupee completed the biggest monthly drop since August on concern higher global oil prices will spur inflation and widen the trade deficit.

The currency lost 0.5 percent this quarter amid concern that a potential drop in farm output amid inadequate rainfall will stoke price pressures. The monsoon, which accounts for more than 70 percent of India’s annual rains, was 43 percent lower than the 50-year average this month, according to the weather department. Brent crude rallied about 3 percent in June amid speculation violence in Iraq will disrupt supplies.

“The drop in the rupee is mainly due to concern about oil prices,” said Naveen Raghuvanshi, a Mumbai-based currency trader at DCB Bank Ltd. “The rupee came under pressure today after the budget deficit data.”

The rupee slumped 1.8 percent this month to 60.1875 per dollar in Mumbai, according to data from local banks compiled by Bloomberg. It fell 0.2 percent today.

India’s fiscal deficit in the two months ended May was 2.4 trillion rupees ($40 billion), or 45.6 percent of the full-year target of 5.28 trillion, the controller general of accounts said today.

India’s trade deficit was $11.2 billion in May, the widest in 10 months, according to the latest official data. The nation imports about 80 percent of the oil it uses.

Wholesale-price inflation quickened to 6.01 percent in May, the fastest this year. Reserve Bank of India Governor Raghuram Rajan last week highlighted a need for preparing to counter geopolitical risks to the economy.

Emerging Risks

“Emerging geopolitical risks may unravel hidden vulnerabilities and emerging market and developing economies like India need to bolster their defences against the impact of uncertainties,” Rajan said in a report on June 26.

One-month implied volatility in the rupee, a gauge of expected swings used to price options, fell 38 basis points this month and 194 basis points, or 1.94 percentage point, this quarter to 7 percent, data compiled by Bloomberg show.

Three-month offshore non-deliverable forwards dropped 0.4 percent today and 1.6 percent in June to 61.06 per dollar, the data show. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in the U.S. currency.

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