India’s rupee completed its third monthly loss after the central bank signaled steps taken in July to buoy the currency are temporary. Stocks and bonds fell.
The Reserve Bank of India held its benchmark rate at 7.25 percent on July 30 and said the past month’s measures, which sought to shore up the rupee by creating a cash squeeze, will be reversed once the exchange rate stabilizes. The RBI, sounding “apologetic” for its actions, is sending confusing signals to investors, according to Nomura Holdings Inc. Higher fund costs resulting from the central bank’s policies may hurt the economy and cause more currency weakness, triggering a “vicious circle,” Credit Agricole CIB said in a research note.
“The market went into yesterday’s meeting expecting the RBI to sound hawkish, and instead the tone was relatively dovish,” Nizam Idris, head of fixed income and currency strategy at Macquarie Bank Ltd. in Singapore, said in a phone interview on July 31. “It would seem odd if the RBI again reverts and imposes more rupee-support steps, so it seems to be left with no choice but to let the market decide a stable level.”
The rupee weakened 1.6 percent last month to 60.3600 per dollar, according to prices from local lenders compiled by Bloomberg. It plunged to an all-time low of 61.2125 on July 8. One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, surged 129 basis points last month, or 1.29 percentage points, to 13.80 percent. That’s the highest in Asia.
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