India’s Rupee Drops to One-Week Low Amid Middle East Tensions

India’s rupee fell to the lowest level in almost a week on concern the escalating conflict in the Middle East will prompt investors to shun riskier assets.

The U.S. and its Arab allies that have joined the fight against Islamic State launched airstrikes into Syria yesterday in the first major expansion of a campaign to defeat the militants. The strikes also targeted the Khorasan group, a network of al-Qaeda that the Pentagon said was planning attacks against the U.S., as the offensive widened from inside Iraq.

“Geopolitical tensions continue to bother investors,” said Anindya Banerjee, a foreign-exchange analyst at Kotak Securities Ltd. in Mumbai. “We, however, do not expect a substantial decline in the rupee because the currency remains an attractive bet for foreign funds as a carry trade.”

The rupee dropped less than 0.1 percent to 60.97 per dollar in Mumbai, prices from local banks compiled by Bloomberg show. It touched 61.05 earlier, the weakest level since Sept. 18, when it reached a one-month low.

Ten-year Indian government bonds also fell, with the yield on the 8.4 percent notes due July 2024 rising one basis point, or 0.01 percentage point, to 8.48 percent, according to prices from the central bank’s trading system.

Losses in rupee and debt markets were also on account of a decision by India’s top court to cancel 214 of 218 coal mine permits given to companies for their own use, after declaring the allocations illegal. The move is a big setback for the economy and will hurt growth, according to Bank of Baroda.

One-month implied volatility in the rupee, a gauge of expected moves used to price options, fell 26 basis points to 6.64 percent. Three-month offshore non-deliverable forwards rose 0.1 percent to 61.82 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.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, were little changed at 8.42 percent, data compiled by Bloomberg show.

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