New Delhi: India’s rupee is set to head higher against the dollar as foreign investors pour money into the rapidly growing economy and the only question is how fast the currency will rise, analysts say.
Lifted by a tide of overseas money into domestic shares following a cut in US interest rates, the Indian currency strengthened beyond the psychologically key Rs40 to the dollar barrier for the first time in nine years last week.
The rupee closed Friday at 39.87 to the dollar and analysts expect it to gain further in coming months as foreign investors buy shares and pour money into plants and infrastructure projects to exploit the booming economy.
“We’re looking for a rupee of around 39 to the dollar by year end and for the rupee to go to around 38.5 or 38 to the dollar by mid next year,” said Richard Yetsenga, HSBC’s Asia currency strategist in Hong Kong.
“The rupee is definitely going up” but the speed of its rise “entirely depends on how vigorous (central bank) authorities are in slowing the rupee’s appreciation,” Yetsenga said.
The central bank has “expressed its desire for slow rupee appreciation but pressure on the rupee (to rise) is so fundamental and robust” that a level of Rs35 to the dollar “is not out of the question,” he said, not specifying a timeframe for such a move.
The rupee has already risen by 11% this year against the dollar, making it Asia’s best performing currency.
Foreign funds have invested $10.47 dollars in Indian equities so far in 2007, more than twice the $4.69 billion they pumped in during the same period last year, lured by record economic expansion. India logged first-quarter growth of 9.3%- the world’s fastest after China.
BNP Paribas country treasurer Manoj Rane forecast the rupee would “rise further on the back of strong capital inflows,” adding the currency could touch 38.50 levels against the dollar by year end.
The rupee got its latest burst of wind last Tuesday when the US Federal Reserve Board cut rates by a surprise 50 basis points to ease credit stress that threatens the world’s biggest economy.
Typically when the Fed lowers rates, investors start looking for higher returns in emerging markets.
The benchmark Bombay Stock Exchange Sensitive Index or Sensex has climbed by 5.7% to a record 16,564.23 points since the rate cut with investors seeing India as a haven from international subprime credit turmoil.
While the nation of 1.1 billion people has been gradually easing rigid state controls on trade and investment and opening up its economy, it remains far less exposed to global financial upheaval than many countries, economists say.
Domestic drivers such as strong capital expenditure and consumption growth “for the Indian market override the concerns from recent dislocations in the global credit and mortgage markets,” said investment bank UBS in a note.
The rupee’s muscle is a novel experience for Indians more accustomed to a currency that a few years back just seemed to lose ground. Until economists began talking about India as an emerging economic powerhouse, “on average you would factor in about a five percent annual depreciation,” noted an analyst.
In mid-2002, a dollar bought Rs49. The rupee’s strengthening has created headaches for exporters, especially for the $50-billion software industry which earns two-thirds of its revenues in US dollars.
“People can factor a steady appreciation into their business costs, it’s when appreciation is too fast it creates problems,” National Association of Software and Services Companies president Kiran Karnik said.
Already average monthly growth in total exports has fallen to 18% so far this fiscal year from 25% in 2006 but exports only account for 14% of GDP so the impact on growth is expected to be limited.
The government’s “ambitious export target of $160 billion - up 25% from the previous year -- will be unachievable,” said Deepak Lalwani at London’s Astaire and Partners. But he forecast a “still respectable increase” to $145 billion.
The central bank will keep trying to brake the currency’s rise through intervention -- buying rupees and selling dollars, analysts said.
“We expect the Reserve Bank of India to continue intervening in the currency markets, in order to allow for some depreciation in the rupee,” said Manika Premsingh, economist at Mumbai’s Edelweiss Capital.
But the bank’s rupee sales to support the dollar and unprecedented foreign investment inflows are raising fears about excess cash sloshing about in the Indian economy that could stoke inflation.