India's Rupee Drops With Bonds as Fed Bets Spur Outflow Concern

  • Foreign holdings of local notes fell in the last two days
  • Ten-year sovereign bond yield rises most since Sept. 7

India’s rupee dropped to a three-week low and sovereign bonds fell on speculation demand for the nation’s assets will weaken as Federal Reserve officials boosted prospects of a December increase in interest rates.

Global holdings of rupee-denominated debt have fallen in the last two days since rising to a record on Monday. Most Asian currencies and stock markets retreated after the U.S. central bank Wednesday dropped a reference to global risks and asserted that economic growth remains “moderate.” A gauge of dollar strength climbed to its highest level since Aug. 7 overnight, with odds policy makers will move at their next meeting now at 48 percent from around 34 percent a week earlier.

“The hawkish Fed statement has hurt sentiment,” said Rohan Lasrado, Mumbai-based head of foreign-exchange trading at RBL Bank Ltd. “Come December, we will have to see what guidance they offer, as a rate action will trigger outflows from emerging markets.”

The rupee weakened 0.6 percent, the most since Oct. 13, to 65.3050 a dollar in Mumbai, prices from local banks compiled by Bloomberg show. It slipped to 65.3175 earlier, the lowest since Oct. 7. The currency has climbed 0.4 percent this month, following a 1.4 percent rally in September.

The yield on 10-year sovereign notes rose four basis points, the most since Sept. 7, to 7.63 percent, according to prices from the Reserve Bank of India’s trading system. That’s also the highest close since Sept. 29. The S&P BSE Sensex of local shares slumped 0.8 percent in a fourth day of declines.

Overseas holdings of Indian debt have declined 6.6 billion rupees ($101 million) from Monday’s record 3.56 trillion rupees, data from the National Security Depository Ltd. show.

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