Rupee snaps 3-day gain after Greece downgrade

The rupee weakened for the first time in four days after Moody’s Investors Service cut Greece’s credit rating to junk, reviving concern that Europe’s debt crisis will undermine the global economic recovery.

The currency retreated from near this month’s high after Moody’s yesterday lowered Greece’s rating to Ba1 from A3, citing “substantial” risks to economic growth from austerity measures linked to an emergency loan package the country secured. European nations including Germany, Italy and Spain have also taken steps to rein in budget deficits this quarter.

“Financial-market sentiment remains jittery as Europe’s debt troubles continue to pose a threat to the global economy,” said Roy Paul, deputy general manager at Federal Bank in Mumbai. “That may affect capital flows to emerging markets and hence the rupee is looking weak.”

The rupee declined 0.2 per cent to 46.57 per dollar as of the 5:30 pm close in Mumbai. That took its loss this quarter to 3.5 per cent, a slide second only to South Korea’s won among Asia’s 10 most-used currencies. The rupee touched 46.41 yesterday, the strongest level since May 31.

Offshore forwards indicated the Indian currency will trade at 46.66 to the dollar in one month, compared with expectations of 46.55 yesterday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

The outlook for the rupee in the short term is not clear, said Thomas Harr, a currency strategist at Standard Chartered in Singapore yesterday. “Trading is going to be choppy for a while,” he said. “The medium term outlook is still bullish due to the Asian growth story.”

Prime Minister Manmohan Singh has projected the economy to grow 8.5 per cent in the financial year that began April compared with a rise of 7.4 per cent in the year that ended March.

Bonds rise after FM declines rate change
Ten-year bonds rose, snapping a four-day decline, after Finance Minister Pranab Mukherjee signalled policy makers aren’t considering a third increase in borrowing costs this year.

Yields fell from a six-week high after Mukherjee said yesterday that he isn’t in favour of “altering” interest rates now. Wholesale-price inflation quickened to 10.16 per cent in May, the most since October 2008, a government report showed yesterday. The Reserve Bank of India (RBI) raised its benchmark rate by a quarter-percentage point in March and April each to the current level of 3.75 per cent.

“Some bond investors are drawing comfort from the finance minister’s comments, which seem to play down the odds of an immediate rate increase,” said Roy Paul, deputy general manager at Federal Bank in Mumbai. The yield on the 7.8 per cent note due May 2020 dropped three basis points to 7.66 per cent as of the 5:30 pm close in Mumbai, according to the central bank’s trading system. The price rose 0.22 per cent, or 22 paise per Rs 100 face amount, to Rs 100.98.

The benchmark bond rose as much as 69 paise earlier. It pared gains after RBI Deputy Governor K C Chakrabarty said inflation is a bigger concern for Indian policy makers than the Europe debt crisis, and that there is a possibility the central bank may raise rates. Mukherjee said today that inflation remains “an area of concern” and the central bank will take “appropriate action.”

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, increased. The rate, a fixed payment made to receive floating rates, rose to 5.47 per cent from 5.31 per cent yesterday.