Indian Rupee to Extend Losses as Volatility Rebounds, BNP Says

By Anil Varma

Jan. 22 (Bloomberg) -- Volatility in India’s rupee will rebound from a four-month low as the currency declines on sales of the nation’s assets by overseas funds, BNP Paribas SA said.

A measure of India’s exchange-rate swings fell to the lowest since September this week, approaching levels before Lehman Brothers Holdings Inc. filed for bankruptcy, even as the rupee headed for a monthly loss. The deepening global economic slump will prompt foreigners to dump riskier emerging-market assets, increasing rupee volatility and losses, said Thio Chin Loo, a senior currency strategist at BNP.

“The spot rupee market is showing the way for options,” Singapore-based Thio said in an interview. “Asian currencies including the rupee are set to decline against the dollar as investors remain risk averse amid the deteriorating global economic situation.”

The rupee has lost 0.7 percent this month, adding to the 19 percent slump last year, as global funds sold $728 million more Indian stocks than they bought. All of the 10 most-active Asian currencies outside of Japan fell against the dollar this month.

The rupee, which closed at 49.13 per dollar in Mumbai yesterday, will weaken to 50 in the coming weeks, Thio said.

Implied volatility on one-month dollar-rupee options was at 14.75 percent yesterday, the lowest since Sept. 26, Bloomberg data show. The gauge of fluctuations touched 33 percent on Oct. 27, the highest in at least nine years. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of option prices.

Currency Options

“The currency options market has been quiet of late, but I expect volatility to pick up in time,” Thio said.

India’s Sensitive Index, or Sensex, fell 6 percent in two days after Royal Bank of Scotland Group Plc forecast on Jan. 19 the biggest loss in U.K. corporate history, fueling concerns that mounting bank losses will renew risk aversion among global investors.

Non-deliverable forward contracts showed traders increased bets for further weakness in the Indian rupee. Offshore contracts indicated yesterday the rupee may trade at 50.12 to the dollar in three months, compared with expectations of 49.79 on Dec. 31.

Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars rather than the local currency.

To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.