India’s Rupee Snaps Three-Day Gain on Rising Odds of Fed Action

Updated on
  • Fed Chair Janet Yellen signals a likely increase in rates
  • Indian currency may move in a 67-69 per dollar range: QuantArt

India’s rupee fell on concern investor appetite for emerging-market assets will wane as the U.S. Federal Reserve considers raising interest rates as soon as June.

Fed Chair Janet Yellen threw her support behind a growing consensus at the U.S. central bank in favor of tightening policy soon, while steering clear of specifying the timing of such a move in remarks Friday at Harvard University. Futures show odds for a rise in June stand at 30 percent, while those for July are at 53.8 percent. Foreign holdings of rupee-denominated debt dropped by 52.3 billion rupees ($779 million) in May, after climbing for two straight months.

“It is Yellen’s commentary that’s driving the market,” said Samir Lodha, managing director at QuantArt Market Solutions Pvt. in Mumbai. “Though India is likely to be impacted less than other emerging markets given its better macroeconomic fundamentals, a Fed hike will cause a flight of capital.”

The rupee, snapped gains of the last three sessions to weaken 0.2 percent to 67.17 a dollar in Mumbai, according to prices from local banks compiled by Bloomberg. The currency has retreated 1.2 percent this month and is Asia’s second-worst performer in 2016 with a 1.5 percent loss after the South Korean won.

QuantArt expects the rupee to move in a 67-69 a dollar range till the Fed’s meeting mid-June, Lodha said. A gauge of developing-nation currencies was headed for its biggest monthly decline since August.

Sovereign bonds rose, with the yield on notes due January 2026 dropping one basis point to 7.46 percent, prices from the central bank’s trading system show. That pared the increase this month to three basis points.

Indonesia and India, which offer the highest yields among major Asian countries, are a favorite with global funds, according to interviews conducted by Bloomberg.
Fund managers may buy more debt in Asia, taking advantage of volatility with an expected Fed rate increase, it show.