Rupee may weaken this week on speculation the central bank will sell the currency to prevent a seven-month rally from hurting exporters’ profit.
The Reserve Bank of India is having to contend with record inflows into Indian stocks and rising foreign investment that helped the rupee to near a 16-month high last week. That is posing a dilemma with the central bank as it strives to mop up funds in the banking system and contain inflation as the economy grows at its fastest since independence in 1947.
“Inflows are very strong, and the rupee is under tremendous pressure to strengthen,” said L.V. Prasad, chief currency trader at IndusInd Bank Ltd. in Mumbai. “To keep the rupee stable, these flows will pose a huge challenge.”
The rupee, which has traded between 44.025 and 44.215 this month, may decline to 44.15 against the dollar this week, according to the median estimate of 10 traders. It closed at 44.105 on 15 February. Indian markets were shut on 16 February for a national holiday.
The rupee’s rally erodes profit at exporters such as Infosys Technologies Ltd., the country’s second-biggest software maker. The government aims to increase shipments overseas by 25 % to $126 billion (Rs5,55,357 crore) in the fiscal year that ends 31 March 31, and to $165 billion by March 2010. Exports account for about 12 % of the country’s gross domestic product.
The Reserve Bank is buying up the dollars flooding the market to keep inflation from accelerating from 6.73 % in the week ended 3 February, the fastest in more than two years. The bank’s foreign-exchange reserves have reached an all-time high, showing the fourth-largest accumulation in Asia after China, Japan and Taiwan.
The central bank last week raised the amount of deposits Indian lenders must set aside by half a percentage point to 6 % and has increased the overnight lending rate five times in a year to drain funds from the market.
The rupee has risen more than 5 % in the past six months as overseas investors poured in funds to take advantage of the record growth. The $854 billion economy is poised to expand 9.2 % this financial year, the government estimates, second to China among the world’s major economies.
“We’ve seen the rupee holding for some time now,” said V. Rajagopal, chief currency trader at Kotak Mahindra Bank Ltd. in Mumbai. “It depends on what level the authorities will be comfortable with.”
JPMorgan Chase & Co. estimates the Reserve Bank may have bought more than $3.5 billion in the first two weeks of this month, almost twice the purchases in December.
The country’s foreign-exchange reserves in the week ended 9 February rose $5.03 billion to the highest-ever of $185 billion, the central bank said on its Web site last week. The increase is the most since at least 1992, according to JP Morgan.
The rupee may extend a 1 % gain in the fiscal year that started 1 April as companies abroad invest in India. Foreign-direct investment may double to $12 billion in the year, according to Trade Minister Kamal Nath.
“The authorities may be keen to stem gains in the currency, but the fundamental pressure for rupee appreciation is extreme,” said Richard Yetsenga, a Hong Kong-based strategist at HSBC Holdings Plc.
Yetsenga expects the rupee to rise to an eight-year high of 43 by the end of the year.
Blackstone Group Holdings LP and Citigroup Inc. with two Indian partners, last week signed an agreement to start a $5 billion infrastructure fund to upgrade the country’s roads, ports and power plants.
Borrowing Costs May Hurt
India’s currency may decline as the rising cost to borrow money may slow economic growth and reverse capital inflows, said S.T.P. Venugopal, chief currency trader at state-owned Central Bank of India in Mumbai.
“The economy will experience a slowdown in a few months as interest rates rise, and that’ll reflect in the rupee,” said Venugopal. “You can’t see the stock index rising for too long,” he said.
The rupee may weaken to 45.20 in three months based on a technical chart that tracks the 200-day moving average in the currency, Venugopal said.
India’s benchmark Bombay Stock Exchange Sensitive Index, or Sensex, has risen 61 % since mid-June.