LM:Rupee drops most in almost two weeks as WPI inflation quickens
Mumbai: India’s rupee dropped the most in almost two weeks as a report showed inflation accelerated, limiting the central bank’s scope to ease monetary policy.
Wholesale prices rose 4.86% in June from a year earlier, compared with a 4.7% increase in May, official data showed today. Price-increases had slowed in the four months through May. Consumer price-inflation quickened to 9.87% last month from 9.31%, while industrial output unexpectedly contracted in May, official figures showed on 12 July. The rupee will weaken in the coming months as the US will pare stimulus this year, according to Emirates NBD PJSC.
“The dollar-rupee exchange rate is likely to remain underpinned in the short term in line with other emerging-market currencies,” Tim Fox, chief economist at Emirates NBD in Dubai, wrote in a research report on Monday. The increase in the inflation rate is “something that the authorities may be sensitive to while the rupee weakness remains”.
The rupee declined 0.7% to 60.0275 per dollar as of 12:11pm in Mumbai, the biggest drop since 3 July, according to prices from local banks compiled by Bloomberg. The currency, which fell to a record 61.2125 on 8 July, will sink to 62 in a month, Fox predicts. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 5 basis points, or 0.05 percentage point, to 12.52%.
The Federal Reserve still intends to start reducing asset purchases, which debased the dollar and contributed to emerging- market inflows, in the final quarter of 2013 and possibly as early as September as the world’s largest economy recovers, Fox wrote. Chairman Ben S. Bernanke said last week the US would need accommodative monetary policy for the foreseeable future.
Sovereign bond
India is considering selling sovereign bonds overseas for the first time as policy makers weigh measures to stem the rupee’s slide, two officials with direct knowledge of the matter said, asking not to be named as the information is confidential, said last week.
“The sale is a possible supporting factor for the rupee,” Vishnu Varathan, a senior economist at Mizuho Bank Ltd in Singapore, said in a 12 July interview.
India’s trade deficit narrowed to $12.2 billion in June from $20.1 billion in May as gold and silver imports fell to $2.45 billion from $8.39 billion, official data showed on 12 July.
Three-month onshore rupee forwards fell 0.3% from 12 July to 61.04 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts dropped 0.3% to 61.15. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
