Rupee Set for Sixth Weekly Loss on Fed Exit Concern; Bonds Fall.

India’s rupee headed for a sixth weekly drop, the longest losing streak in a year, on speculation U.S. policy makers will scale back asset purchases that have boosted inflows into emerging markets. Bonds fell on concern a weaker currency will spur inflation.

The rupee slid to a record low on June 11, before paring losses as Fitch Ratings revised the nation’s credit-rating outlook to stable from negative a day later and policy makers took steps to boost dollar supply. India’s inflation rate was probably above 5 percent in May, Planning Commission Deputy Chairman Montek Singh Ahluwalia told ET Now television channel yesterday. The median estimate of 35 economists in a Bloomberg survey, before data due today, is for 4.88 percent.
“The rupee’s fall has not been in isolation,” R. Sivakumar, head of fixed income at Axis Asset Management Co., wrote in a research report yesterday. “Rupee weakness increases the cost of imported commodities and could have an adverse impact on inflation in the coming months.”

The rupee depreciated 1.4 percent this week to 57.8450 per dollar as of 9:55 a.m. in Mumbai, according to data compiled by Bloomberg. It touched an all-time low of 58.9850 on June 11 and has risen 0.3 percent today. Seven of 11 most-active Asian currencies weakened against the greenback since June 7.

The yield on the benchmark 8.15 percent government bond due June 2022 rose 14 basis points, or 0.14 percentage point, this week to 7.55 percent, according to the central bank’s trading system. It declined one basis point today.
The Reserve Bank of India will keep its benchmark repurchase rate at 7.25 percent at a June 17 review, according to 13 of 23 economists in a Bloomberg survey. Ten predict a 25 basis point cut.

Fed Stimulus

Federal Reserve Chairman Ben S. Bernanke said May 22 the monetary authority could scale back stimulus efforts should U.S. employment show “sustainable improvement.” The $85 billion of bond purchases each month debases the dollar and contributes to inflows to emerging markets. The Federal Open Market Committee meets next week.
India’s Finance Minister Palaniappan Chidambaram signaled yesterday foreign investment caps will be eased further and said steps are being taken to curb rupee swings. Policy makers are weighing measures including a debt offering to Indians living abroad to attract investment and offset a record current-account deficit, Raghuram Rajan, the top adviser at the finance ministry, told reporters on June 11.

Bond Limit

Long-term investors, including sovereign-wealth funds, multilateral agencies and foreign central banks, can buy $5 billion more Indian sovereign debt, the central bank said in a June 12 statement. The cap on overseas ownership of government notes is now $30 billion, compared with $25 billion earlier. Global funds have sold more rupee debt than they bought each day since holdings reached a record $38.5 billion on May 21.

The RBI sold dollars on June 11 and 12 to slow the rupee’s slide, said two people with knowledge of the matter who asked not to be named because the information isn’t public. One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, rose 180 basis points this week to 10.83 percent.

Three-month onshore rupee forwards fell 1.4 percent from a week ago to 58.76 per dollar, according to data compiled by Bloomberg. Offshore non-deliverable contracts dropped 0.9 percent to 58.78. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

Source : bloomberg.com