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Rupee drops most in a week as Fed signals rate increase


The partially convertible rupee opens at 61.16 per dollar compared with its previous close of 60.96

Rupee drops most in a week as Fed signals rate increase
The rupee weakened 0.3% to 61.165 per dollar as of 10:41 am in Mumbai, the biggest drop since 12 March, according to prices from local banks compiled by ‘Bloomberg’. Photo: Priyanka Parashar/Mint
Mumbai: India’s rupee fell the most in a week after the US cut stimulus further and signalled interest rates will be raised, potentially damping fund flows into emerging markets.
The Federal Reserve reduced its bond-buying programme by $10 billion on Wednesday to $55 billion. The purchases will finish by year-end with a borrowing-cost increase to follow in around six months, chair Janet Yellen indicated. The rupee’s losses will probably be limited because its 12.6% rebound from a record low in August, the best performance among 24 developing-nation currencies, is helping attract overseas investors, according to FirstRand Ltd.
“If the Fed announcement had come six months ago the rupee’s drop would have been much steeper,” said Paresh Nayar, head of currency and money markets at FirstRand in Mumbai. Sentiment has turned. The Fed statement was discounted to a large extent and we even saw some inflows today.
The rupee weakened 0.3% to 61.165 per dollar as of 10:41 am in Mumbai, the biggest drop since 12 March, according to prices from local banks compiled by Bloomberg. It fell as low as 61.385 earlier. Nayar sees the currency trading mostly between 61 and 61.40 on Thursday.
The Federal Open Market Committee said yesterday it will no longer link borrowing costs to a specific unemployment rate, and will consider a broad range of indicators on the labour market, inflation and financial markets instead. Separately, the Fed released forecasts showing more officials predicting the benchmark rate, now close to zero, will rise at least to 1% at the end of 2015 and 2.25% by the end of the following year, higher than previously forecast.
Capital inflows
The rupee declined less today than the currencies of Indonesia, Thailand, South Korea and Malaysia. The rupiah slid 1% and the baht 0.7%, while the won and the ringgit lost 0.5% each. Global funds bought a net $1.6 billion of Indian stocks and $6.2 billion of rupee-denominated debt this year, exchange data show, as inflation eases and the government forecasts narrower deficits.
The current-account shortfall will be kept below $40 billion in the year through 31 March, finance minister P. Chidambaram said in a 7 March briefing in New Delhi, compared with a record $88 billion in the previous 12 months. The budget gap will narrow to 4.6% of gross domestic product, the least since 2007-2008, from 4.9%, he estimated in February.
One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, rose 35 basis points, or 0.35 percentage point, today to 9.14%. The measure has dropped 106 basis points in 2014.
The rupee’s three-month offshore non-deliverable forwards fell 0.4% to 62.40 per dollar. 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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