Mumbai: India is stepping up purchases of US dollars after a 5% gain in the rupee in six months eroded corporate profits and threatened to slow the economy.
The central bank bought about $1.5 billion (Rs6,600 crore) in the past week as the rupee reached a one-year high, according to estimates by JPMorgan Chase & Co. That’s almost as much as the $1.8 billion India bought in December.
The Reserve Bank of India (RBI) wants to curb the currency’s gains to boost Indian exports and stoke economic growth, the fastest in the world after China. Infosys Technologies Ltd, India’s second-biggest software company, last month said the rupee’s appreciation squeezed profit margins 2 percentage points in the quarter ended 31 December 2006.
“The central bank needs to protect exports while reining in imports, so the trade deficit doesn’t get wider,” said Nizam Idris, a Singapore-based currency strategist at UBS AG.
The rupee is the eighth-best-performing currency among 70 against the dollar over six months as foreign investors bought the Indian currency to purchase shares and to expand factories. It rose as high as 44.025 per dollar on 9 February, before closing the week little changed at 44.136. The rupee fell 0.1% to 44.161 at the 5pm close on Monday in Mumbai, as RBI again sold its own currency, said Rohan Lasrado, a trader in Mumbai at HDFC Bank, the nation’s third-biggest lender.
The currency may rise another 1% to 43.60 by the year-end, according to the median forecast of 20 analysts surveyed by Bloomberg. Nizam said the rupee may climb beyond 44 by the year-end because RBI can only slow, not halt, the currency’s appreciation.
Central bank foreign exchange reserves rose about $2.5 billion in January to a record $180 billion, an indication the country bought dollars. RBI spokeswoman Alpana Killawala declined to comment on more recent currency transactions.
The government wants to restrain the rupee gains to boost exports and narrow a current-account deficit that widened to $11.7 billion in the six months through 30 September from $7.2 billion a year earlier.
The stronger currency has also made Infosys Technologies less competitive with rivals such as International Business Machines Corp. Satyam Computer Services Ltd, the fourth-biggest software services exporter, cut its full-year sales forecast because of the rupee’s gains. RBI forecasts India’s economy will grow 9.2% in the year ending 31 March.
China grew 10.7% in 2006.
Direct investment in India by companies, including Japan’s Suzuki Motor Corp. and Luxembourg’s Arcelor Mittal, the world’s biggest steelmaker, has pushed the rupee higher. Suzuki controls India’s biggest carmaker, New Delhi-based Maruti Udyog Ltd. The government predicts foreign direct investment will almost double to $12 billion in the year ending 31 March.
The interest among global money managers in India has been spurred in the past month by Standard & Poor’s decision in January to award India an investment-grade credit rating for the first time in 14 years.
India’s government has sought to discourage purchases of bonds so it can maintain control over the rupee. Overseas investors are limited to holding only $2.6 billion of the $222 billion in outstanding Indian government debt.
RBI governor Yaga Venugopal Reddy said in his quarterly policy statement on 31 January that the central bank needs to be “vigilant” on foreign investment flows “to contain extreme volatility” and protect the poor from disruptions.
“We’re interested in new markets and diversification, and the regulations there are hindering us,” said Michael Ganske, who manages $7 billion of emerging-market debt at Deka Investment GmBH in Frankfurt.
Finance Minister Palaniappan Chidambaram may approve a token increase to investment by foreigners in government debt to about $3.5 billion in his budget on Feb. 28. That amounts to less than 2 percent of total debt, said Sanjeet Singh, a bond trader at ICICI Securities Ltd., a Mumbai-based primary dealer.
The currency may decline in the next three months as RBI sells rupees and overseas investors cut holdings of Indian equities, said James Malcolm, a strategist at Deutsche Bank AG in Singapore.