India’s rupee headed for a fifth weekly drop on concern the Federal Reserve may scale back debt purchases that have fueled fund flows to emerging markets. Government bonds rose.
Overseas investors bought $15.3 billion more local shares than they sold this year through June 5, helping ease pressure on the rupee from India’s record current-account deficit. Fed Chairman Ben S. Bernanke said last month the central bank may cut the pace of bond purchases, known as quantitative easing, in the next few meetings if policy makers see indications of sustained improvement in the U.S. jobs market.
“The withdrawal of QE by the Fed might not mean an immediate withdrawal of funds from India but is more likely to lead to a stoppage of flows,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai. “The currency will remain weak, specifically as reliance of India on global flows continues to be strong due to the large current-account deficit.”
The rupee fell 0.6 percent this week to 56.795 per dollar as of 10:08 a.m. in Mumbai, according to data compiled by Bloomberg. The currency rose 0.1 percent today. It touched 57 yesterday, the weakest level since June 28, 2012. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell 34 basis points, or 0.34 percentage point, this week to 8.9 percent.
The Fed is buying $85 billion of Treasury and mortgage bonds each month to keep borrowing costs low and spur the U.S. economy. Nonfarm payrolls data due today may provide an indication of whether the purchases will be reduced.
The shortfall in the current account, the broadest measure of trade, was probably about 5 percent of gross domestic product in the fiscal year through March 2013, Reserve Bank of India Governor Duvvuri Subbarao said last month. India, the world’s largest gold buyer, increased import duties on the precious metal this week to 8 percent from 6 percent to rein in the gap.
Wholesale prices rose 4.88 percent in May, the least since 2009, according to a Bloomberg survey of economists before official data due June 14.
The yield on the 7.16 percent government bonds due May 2023 fell four basis points this week and one basis point today to 7.21 percent, according to the central bank’s trading system.
Three-month onshore rupee forwards traded at 57.72 per dollar, compared with 57.42 on May 31, data compiled by Bloomberg show. Offshore non-deliverable contracts were at 57.69 versus 57.60. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
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