Rupee Volatility Surges Most in 10 Months as Outflow Risks Rise

  • Gauge of expected swings jumps 107 basis points in two days
  • ‘Too much uncertainty around global events’: DCB Bank

A gauge of expected swings in India’s rupee capped its biggest two-day jump since August amid signs demand for local assets is waning as anxiety about global central bank meetings and a potential British exit from the European Union grips investors.

Foreign funds cut holdings of rupee-denominated bonds by 3.01 billion rupees ($44.8 million) on Tuesday, taking outflows for June to 20.7 billion rupees, data compiled by Bloomberg show. Their purchases of Indian stocks slowed to $244.3 million last week, from $441.1 million in the previous five days. Growing support for Britain to leave the EU ahead of a June 23 vote is spurring risk aversion, with investors also watching the U.S. Federal Reserve’s policy decision on Wednesday, followed by Thursday’s reviews in Japan and the U.K.

“There’s just too much uncertainty around global events,” said Navin Raghuvanshi, a Mumbai-based foreign-exchange trader at DCB Bank Ltd. “Even foreign investors have been as good as net sellers in local markets.”

The rupee’s one-month implied volatility, used to price options, climbed 37 basis points to 6.87 percent in Mumbai, according to data compiled by Bloomberg. That took its two-day advance to 107 basis points, the most in such a period since last August. The currency rose 0.2 percent to 67.1525 a dollar in the spot market, halting a four-day, 0.9 percent slide.

Carry Trade

Even so, when adjusted for price swings, the rupee has been the best-performing carry trade in the past year after the Indonesian rupiah among 23 emerging markets tracked by Bloomberg, and that’s a reason some investors including AllianceBernstein LP are sticking with it.

“In Asia, there aren’t many currencies that offer decent carry, so we’re content to accept the volatility of the rupee for the carry on offer,” Brad Gibson, a Hong Kong-based portfolio manager for AllianceBernstein, which oversees $487 billion globally, said in an interview. “While we are not strongly positive on the bond markets at these levels, the currency in terms of the carry is probably one of the safest in emerging markets.”

Indian sovereign bonds were steady, with the yield on notes due January 2026 at 7.52 percent, according to prices from the central bank’s trading system. It climbed to 7.53 percent on Monday, the highest close since March 16, before a report showed consumer inflation accelerated to a 21-month high of 5.76 percent in May.

Three-month borrowing costs for India’s government slumped to the lowest level since 2010 at Wednesday’s auction of treasury bills amid central bank measures to improve cash supply in the financial system.

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