Mumbai: The Reserve Bank of India (RBI) will support the rupee and increase interest rates twice more this year to combat inflation, according to Standard Chartered Plc.
Asset managers should turn “neutral” on the rupee from “underweight” as authorities “have finally woken up” to the inflation threat and are starting to raise rates to “more appropriate levels,” the UK-based bank that makes most of its money in Asia said in a research report. Policymakers appear to defend the rupee from weakening past 43.50 as a decline may make inflation worse, according to the bank.
“We believe risk-reward balance has changed for the rupee as tight monetary policy could mitigate rupee weakness for now,” Thomas Harr, the bank’s Singapore-based strategist, said in an interview on Wednesday. “Most negatives for the rupee are currently in the price.”
The rupee rallied 1.5% on Wednesday, the most since January 1998, on speculation the government will allow more overseas investment in the financial sector after Prime Minister Manmohan Singh survived a confidence vote on 22 July.
The rupee closed at 42.13 on Thursday, down 0.1%, according to Bloomberg data. The local currency has rebounded 3.3% from a 15-month low of 43.475 it touched on 1 July as crude oil prices slumped almost 16% from their 11 July record to trade below $125 (Rs5,380) a barrel.
The central bank may increase its benchmark repurchase rate, or its overnight lending rate, twice by 50 basis points, or half a percentage point, each to 9.5% in 2008, the analysts said. It may also raise the reverse-repurchase rate, or the rate at which it drains money from the banking system overnight, twice by a similar amount to 7%.
RBI governor Y.V. Reddy increased the policy rate in June twice to tame inflation after keeping it unchanged for almost 15 months. He last raised it on 24 June to 8.5%.
The rupee may end the third quarter at 42.80 against the dollar and 43 by end-December, the report said, lifting the earlier forecasts of 43.25 and 43.50, respectively.