RBI’s Patel doing his best to keep the good times rolling for rupee, and how!


India’s new central bank head seems to be doing his best to keep the good times rolling for the rupee after its biggest quarterly gain in 2 1/2 years.

Reserve Bank of India data show foreign-exchange reserves slumped $4.3 billion in the week through Oct. 7, suggesting to traders that the RBI is seeking to support the currency that’s fallen in October after a three-month winning run. Societe Generale SA predicts the rupee will still drop to a record low by December 31 as maturing foreign-currency deposits and a potential Federal Reserve interest-rate increase trigger outflows from Asia’s third-largest economy.

The drop in reserves is “likely due to intervention in the spot markets,” said Amit Agrawal, a Bengaluru-based currency strategist at SocGen. “The rupee will be under pressure due to outflows emanating from maturing deposits and risk-off because of higher Fed rates.”

Maintaining exchange-rate stability is one of the biggest challenges for Urjit Patel, who took charge at the RBI last month, after rupee swings more than halved during former governor Raghuram Rajan’s three-year term. A weaker rupee could dim the allure of emerging Asia’s best-performing sovereign bonds for global investors and risk ruining the progress policy makers have made in taming inflation.

The RBI estimates about $20 billion will leave the country by year-end as the deposits it raised from non-residents in 2013 to support the rupee started maturing from September. The central bank has been building reserves and while it has also bought dollars in the forward markets to tackle the exit of funds, SocGen says the authority still faces a gap of $9.5 billion to meet the commitments over October and November.

The decline in India’s foreign-exchange reserves took the hoard to $367.6 billion, from an all-time high of about $372 billion in the week through Sept. 30. China, which has the world’s biggest currency stockpile, saw its reserves shrink more-than-expected last month to $3.17 trillion. Alpana Killawala, Mumbai-based spokeswoman for the RBI, didn’t immediately respond to an e-mail seeking comment.

SocGen’s Agrawal predicts the rupee will slide to 68.90 per dollar by the end of the year, a 3.2 per cent decline from its close of 66.6775 in Mumbai on Wednesday, and weaker than the unprecedented 68.845 level seen in August 2013. Foreign investors sold a net $341 million of Indian shares last week, the most since February, after pumping in $4.6 billion last quarter. Odds of a U.S. rate hike by December rose to 66 per cent earlier this week, from 59 per cent at the end of the last month.

The rupee is down 0.1 per cent in October following a 1.4 per cent advance in the previous three months. The currency has strengthened 3.2 per cent from a recent low of 68.7875 in February as India’s current-account deficit narrowed and consumer-price inflation slowed to a 13-month low of 4.31 per cent in September.

As the central bank puts reserves to work, the rupee’s one-month implied volatility, a gauge of expected swings used to price options, has slumped 63 basis points in October to 4.87 per cent on Wednesday, after climbing in each of the last two months.

“The RBI built reserves to minimize volatility from the mismatch between forward purchases and maturing deposits,” Radhika Rao, Singapore-based economist at DBS Bank Ltd., wrote in a report Monday. It “has also been unwinding its forward positions,” she wrote.