Rupee volatility sinks to 2008 low on India inflows, oil decline

By Kartik Goyal

A gauge of expected swings in the rupee dropped to the lowest level in more than eight years as oil prices tumbled and on signs demand for Indian assets continues to be strong.

The rupee climbed in July as foreign holdings of local stocks and bonds jumped amid speculation global central banks will boost stimulus to contain the fallout from the U.K.’s June vote to exit the European Union. Data showing U.S. economic growth missed forecasts in the second quarter has damped bets the Federal Reserve will raise interest rates this year, burnishing the appeal of emerging markets like India.

The rupee’s three-month implied volatility, used to price options, fell one basis point to 5.86 percent in Mumbai, the lowest level since April 2008, according to data compiled by Bloomberg. The currency was little changed at 66.74 per dollar in the spot market, after gaining 0.8 percent in July in its first monthly advance since March.

“Strong inflows, which are likely to continue, have contributed to reduced rupee volatility,” said Anindya Banerjee, associate vice-president for currency derivatives at Kotak Securities Ltd. in Mumbai. “Lower oil prices are a positive for a net oil-importing nation like India.”

Asia’s third-largest economy imports about three quarters of its oil. Political stability, credible monetary policy and the fastest growth among the world’s major nations make India the ‘safest portfolio investment destination’ among emerging markets, according to OppenheimerFunds Inc., which oversees about $217 billion of assets globally. Foreign holdings of rupee-denominated debt jumped by about 70 billion rupees ($1 billion) last month, the most since October, while net inflows into shares totaled $1.7 billion.

Investors have also been drawn by the nation’s promise of policy reforms. Prime Minister Narendra Modi’s government is inching closer to getting clearance for a national sales tax -- one of India’s biggest economic reforms since the 1990s. The central bank this week eased rules to allow applicants to seek permits for setting up banks on a continuous basis, replacing a system that created long delays between approvals.

The yield on sovereign notes due January 2026 rose four basis points, the most since April 21, to 7.18 percent, according to prices from the central bank’s trading system. Despite plunging the most since May 2013 last month, India’s 10-year yield is the highest among major Asian markets.