Bloomberg News

India Rupee Drops Most in 2 Weeks as Europe Stimulus Disappoints

July 06, 2012

India’s rupee fell the most in two weeks on speculation stimulus measures announced by European policy makers will be insufficient to revive global economic growth.

The currency pared this week’s gain after European Central Bank President Mario Draghi deflected questions yesterday about further steps such as quantitative easing, after reducing the benchmark rate to a record low 0.75 percent and the deposit rate to zero. India sold 402.5 billion rupees ($7.3 billion) of allocations for purchasing rupee-denominated debt to foreign investors on July 4, falling short of the 599 billion rupee target, two people familiar with the matter said.

Speculation that investors would use additional euros to pump money into emerging-market assets “was dashed when the ECB refrained from discussing unconventional stimulus measures,” said Jonathan Cavenagh, a strategist at Westpac Banking Corp. in Singapore. “India has its own fundamental issues to deal with, and so until the nation’s policy makers resolve some of the structural problems, the currency will be vulnerable.”

The rupee declined 0.9 percent to 55.4787 per dollar as of 9:43 a.m. in Mumbai, the biggest drop since June 22, according to data compiled by Bloomberg. That pared its weekly advance to 0.3 percent. The currency will probably weaken to 57 in the “coming weeks” and will trade between that level and 54 through this quarter, Cavenagh forecast.

China Rate Cut

One-month implied volatility, a measure of exchange-rate swings used to price options, rose 30 basis points, or 0.30 percentage point, to 12.20 percent today. It is up 55 basis points this week.

The People’s Bank of China yesterday cut its benchmark lending rate, while the Bank of England raised the size of its asset-purchase program. Two weeks ago, the Federal Reserve expanded a program lengthening the maturity of bonds it holds and Chairman Ben S. Bernanke indicated more measures will be taken if needed.

Three-month onshore currency forwards traded at 56.47 per dollar, compared with 56.12 yesterday, and offshore non- deliverable contracts were at 56.48 from 56.07. Forwards are agreements to buy or sell assets at a set price and date. Non- deliverable contracts are settled in dollars.

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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