India’s Rupee Falls on Speculation that Central Bank is Intervening

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India’s Rupee Falls on Speculation that Central Bank is Intervening India’s rupee declined the fastest in a month as traders speculated that the Reserve Bank of India had intervened in the currency markets in order to prevent further rise in the currency, which is threatening to hurt exports, while importers rushed to buy dollars to pay their overseas obligations.

The rupee plunged 0.4 percent to trade at 58.7150 a dollar in Mumbai, the largest decline since April 23. The currency had earlier hit 58.3350 on Friday, its highest level since June 2013. The rupee has advanced 2.8 percent in May, making it the best performing currency in Asia, as the market exuded optimism that the incoming government will enact favorable economic policies to spur growth.

“State-owned banks bought dollars, possibly on behalf of the Reserve Bank of India,” Paresh Nayar, a Mumbai-based head of currency and money markets at FirstRand Ltd told Bloomberg. “We are also seeing oil companies demanding dollars.”

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The new Prime Minister Narendra Modi’s Bharatiya Janata Party clinched the first Indian single-party majority victory in 30 years, fuelling speculation that it will have room to govern without being encumbered by tiresome coalition politics. BJP grabbed 282 seats out of the 543 parliamentary seats in the elections, surpassing the 272 seats required to form a government.

India’s current account gap shrunk to $1.2 billion in the first quarter from $4.3 billion in the final three months of 2013, data released on Monday showed. On a year-on-year basis, the shortfall declined to $32.4 billion in the year ended March 31 down from the$87.8 billion a year earlier. Foreign investors have purchased a net of $4.3 billion worth of local bonds and stocks by May 22.

The rupee’s one-month implied volatility, which measures the expected shifts in the exchange rate used to assign prices to options, tumbled 0.05 percentage point, or five basis points, to 7.4475 percent. To register for a free 2-week subscription to ForexMinute Premium Plan, visit www.forexminute.com/newsletter.

To contact the reporter of this story; Yashu Gola at yashu@forexminute.com