India’s rupee may fall this week, ending two weeks of gains, on speculation that the central bank will sell the currency after it climbed to the strongest in a month.
The rupee had its biggest gain in six weeks in the five days ended 16 March, pushing up the price of India’s exports and making them less competitive compared with those of its competitors.
That may prompt Reserve Bank of India to sell the currency, said Mohan Shenoi, treasurer at Kotak Mahindra Bank. The rupee may drop 0.3% to Rs44.23 this week, according to a Bloomberg News survey of 10 traders.
“There will be speculation of central bank intervention since the rupee is showing sustained strength,” Shenoi said. “That will keep the rupee under pressure.”
India’s currency rose 0.3% to Rs44.1175 to the dollar in the week through 16 March, according to data compiled by Bloomberg. That’s the biggest gain since the week ended 2 February.
An increase in the currency makes goods and services more expensive for overseas buyers, slowing export growth and widening the current-account deficit. That gap, a key measure watched by traders to determine a currency’s strength, almost doubled to $10.6 billion in 2006-07, from $5.4 billion the previous year.
“I expect the deficit will be almost the same in the next financial year beginning April 1,” Shenoi said. “The rupee is overvalued. It should have been somewhere around 46.”
India’s exports fell to $9.6 billion in January from $9.9 billion the previous month, the ministry of commerce and industry said on 1 March. Exports account for about 10% of Asia’s fourth-largest economy.
Any decline in the rupee may be tempered by speculation that exporters will convert their foreign-exchange earnings to rupees before the financial year ends.
“The rupee may get support as exporters will look to boost their balance sheets ahead of the financial year-end,” said V. Venugopal, a currency trader at Andhra Bank. “Since the rupee has risen significantly, exporters may want to bring back some overseas earnings.”
Commerce minister Kamal Nath has said he wants exports to rise 25% to $126 billion by the end of this fiscal, and to $165 billion by March 2010.
The currency may still fall on concern fund managers abroad will sell local equities after the benchmark stock index fell for a fifth week through 16 March, the longest run of losses in more than nine months, Shenoi said.
Overseas investors sold $253.5 million more local equities than they bought this month through 15 March, according to the Securities and Exchange Board of India.