Indian Rupee Weakens, Fed Tapering on the Horizon

India’s rupee touched the lowest level in almost a month as better-than-estimated U.S. data revived concern the Federal Reserve will pare stimulus earlier than anticipated. Bonds were steady.

The rupee fell 0.4 percent to 61.8600 per dollar in Mumbai, according to prices from local banks. The currency touched 62.0100 earlier, the weakest level since Oct. 10. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 36 basis points, or 0.36 percentage point, to 11.25 percent.

Three-month onshore rupee forwards fell 0.4 percent to 63.21 per dollar. Offshore non-deliverable contracts fell 0.4 percent to 63.56. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

The rupee is unlikely to fall below 63 to a dollar even if the Reserve Bank of India (RBI) withdraws temporary measures such as direct sale of dollars to oil importing companies and the foreign currency non-resident (FCNR) swap facility put in place to support the currency, as speculative activity around it has mostly ebbed in the foreign exchange market, according to a paper released by the Associated Chambers of Commerce and Industry of India (Assocham).

Besides, foreign institutional investors (FIIs) have turned buyers in the capital market and exports have made an impressive rebound - the developments that would lend support to the rupee, which will trade in the range of 62-63, the paper says.

Worries on current account deficit (CAD) have also gone away, and Finance Minister P. Chidambaram has already stated that CAD for the current fiscal would not be more than $60 billion, the paper adds.

The FCNR deposit swap facility, which has already raked in more than $13 billion to the country’s forex kitty, is likely to bring in $20 billion directly to the sovereign treasury when the facility ends by November 30.

Besides, the RBI may end the direct dollar access to the oil importing companies even earlier.