By Anoop Agrawal
Mumbai: Credit Suisse Group raised its forecast for the rupee on speculation that economic growth will drive overseas demand for the nation’s stocks.
The rupee is the fourth-best performing currency in the world this year, rising by 7.4% as India has grown at the second- fastest pace among the world’s 20 biggest economies. The bank also predicts that the currency will extend gains from near the highest in nine years on bets that the Reserve Bank of India (RBI) will allow it to strengthen to help curb inflation.
“The rupee will appreciate due to the capital flows,” Nilesh Jasani, head of research at Credit Suisse’s Indian unit, said on 7 May. “The other reason is the central bank’s decision, or maybe its implicit policy, to use a slightly stronger rupee to tackle inflation.”
The rupee will advance to 40.5 against the dollar by March next year compared with an earlier estimate of 43.5, Jasani said.
The currency fell by 0.2% today to trade at 40.985 in Mumbai. It reached 40.545 on 7 May, the strongest since May 1998.
Global Fund Buying
Credit Suisse’s forecast revision comes after stock exchange data showed global funds bought $1.52 billion more Indian shares than they sold last month. They sold $243 million more equities than they purchased in March.
The Bombay Stock Exchange’s Sensitive Index (Sensex) gained a fourth week through 4 May on optimism that the economic growth accelerated in the fiscal year ended 31March. The Central Statistical Organisation on 7 February raised its growth forecast for the period to 9.2%.
The rupee may rally for a 10th consecutive week, the longest rally since August 2002, on speculation the Reserve Bank won’t sell the currency to help exporters.
India’s inflation rate slowed to 5.77% in the week ended 21 April from 6.09% the previous week. A stronger rupee can help quell inflation by making imports cheaper.
Inflation is being fueled by a combination of rising demand for commodities and supply constraints, IFinance Minister P Chidambaram said on 8 May.
Any gains in the currency may be tempered by speculation investors will pull out of investments in riskier assets in favour of safer US dollar-denominated assets, Jasani said.
The threat to our rupee forecast “could be the strength in dollar globally against all major currencies,” he said.