By Anoop Agrawal, Bloomberg
Mumbai: Rupee extended gains to the highest in almost nine-years, the biggest fluctuation of any currency today, on speculation that the exporters were buying to protect earnings from further appreciation.
This month’s 3.1% rise in the rupee erodes profit in local currency terms for Indian companies such as Reliance Industries Ltd. Finance Minister P Chidambaram yesterday said the rupee is “still competitive,” suggesting more strength. Investment into India almost doubled in the quarter ended December, driving up demand for the currency.
“Sentiment is in favour of the rupee because of the strong capital flows,” said Rohan Lasrado, a currency trader at HDFC Bank Ltd. in Mumbai. “Some exporters, who earlier waited for the rupee to decline, may have now been prompted to sell dollars.
The rupee climbed by 1.1 % to 42.165 against the dollar as of 2:09 p.m. in Mumbai, according to data compiled by Bloomberg. It reached 42.0325, the highest since June 1998.
India is luring global funds to its stock market and overseas companies are setting up factories. Asia’s fourth- biggest economy probably expanded 9.2 % in the fiscal year that ended 31 March, the fastest in almost two decades, according to the government’s forecast.
The rupee is one of the top 10 gainers among the world’s most-actively traded currencies this year, rising by 4.6 %. Foreign direct investment rose to $4.9 billion in the quarter through December from $2.7 billion in the previous quarter, according to government data.
The benchmark Bombay Stock Exchange Sensitive Index, or Sensex, has quadrupled since 2001, Bloomberg data show.
Central Bank Sales
The rupee may end the week at 42.40, according to the median estimate of 10 traders surveyed by Bloomberg News on 13 April. Lasrado at HDFC predicts 42.20.
3i Group Plc, Europe’s biggest publicly traded buyout and venture capital firm, plans to raise $5 billion for a fund to invest in Indian ports, power plants and roads, two people with knowledge of the plan said last week.
The rupee “appreciation is because of the large inflow of capital,” Finance Minister Chidambaram said. “The rupee is still very competitive relative to other currencies.”
Strength in the rupee may be capped by speculation the central bank will sell it to ensure the nation’s exporters don’t lose out to competitors in international markets because of the higher cost of goods from the exchange rate.
Growth in shipments abroad slowed to less than 10 % for the third straight month through February, raising concern the trade deficit will widen even as crude oil prices rise.
Importers may also jump in to buy dollars, funding the purchases at a cheaper rate in the rupee.
“I’d advise importers to start buying dollars,” said M. Natarajan, chief of currency and bond trading at IndusInd Bank Ltd. in Mumbai. “The central bank has several options to intervene.”
The rupee may weaken to 42.60 this week, Natarajan said.
The Reserve Bank of India on 13 April said it will sell Rs30 billion ($705.2 million) of bonds to drain excess funds from the banking system.
Central banks of developing countries are finding strong capital flows a challenge to sustaining financial stability, the Reserve Bank’s Deputy Governor Rakesh Mohan said in a statement to the International Monetary Fund in Washington on 14 April.
“The deceleration in exports suggests the central bank is unlikely to allow further rupee appreciation,” wrote JPMorgan Chase & Co.’s Singapore-based economist Rajeev Malik and Mumbai- based strategist Vikas Agarwal in a research note last week.
Trading in the rupee forwards market signals the currency will drop by 6.54 % in three months to 45.29 against the dollar. Forwards are agreements in which assets are bought and sold at current prices for future delivery. The currency may weaken to 43.60 by the end of June, the median estimate of 21 contributors to a separate Bloomberg survey over the past month shows.
The world’s biggest movers are based on changes in price yield and are screened for the size of the market and amount daily trading.