Rupee Volatility at 2-Month High as Debt Outflows Rise

A gauge of expected swings in India’s rupee rose to the highest in more than two months as global funds stepped up sales of the nation’s debt amid uncertainties over a retrospective tax on capital gains.

Overseas investors were net sellers of $190 million of local-currency notes last week, according to the latest figures. They have withdrawn $192 million this month, after being net buyers in each month since April 2014. India has demanded that foreign portfolio investors pay a 20 percent levy on past capital gains. Outflows have continued even as the tax authority last week said investors can use treaties to reject such demands. Government bonds were little changed.

“Investors are cautious about the retrospective tax and with the uncertainty over the issue, flows have turned negative,” said Paresh Nayar, head of currency and money markets at FirstRand Ltd. in Mumbai. “That’s weighing on the currency.”

Three-month implied volatility rose 10 basis points, or 0.1 percentage point, to 8.35 percent in Mumbai, data compiled by Bloomberg show. This was the highest since February 13. The rupee rose 0.1 percent to 63.49 a dollar, after weakening as much as 0.3 percent.

The currency touched 63.7675 earlier, the lowest level since Dec. 30. It has slumped 1.9 percent in the five days ended April 24, its second straight weekly loss and the biggest since August 2013.

Global funds, which boosted holdings of rupee-denominated sovereign and corporate debt by a record $26 billion in 2014, have pumped in another $6.6 billion this year as plunging oil prices helped slow India’s inflation, allowing the central bank to cut interest rates twice. The demand for back-dated Minimum Alternative Tax threatens to undermine investors’ perception of the one-year-old government, after Prime Minister Narendra Modi campaigned on promises of cutting red tape.

Notices have been sent to 68 funds for arrears of about 6 billion rupees ($94 million), junior finance minister Jayant Sinha told lawmakers on April 24.

The yield on the 8.4 percent government notes due July 2024 fell one basis point, or 0.01 percentage point, to 7.78 percent in Mumbai, according to prices from the Reserve Bank of India’s trading system.

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