The rupee may decline from a nine-year high because the Reserve Bank of India (RBI) will sell the currency to protect exports, say Deutsche Bank AG and Goldman Sachs Group Inc.
Options are also signalling the two-month rally is poised to stall. In November, the last time the premium on calls granting the right to buy rupees was as high as it reached this week, the rupee lost 1% within two weeks, posting its biggest weekly drop since July.
RBI “has a strong position of targeting the exchange rate,” said Thomas Stolper, senior global markets economist at Goldman Sachs in London. “They will come back into the market and not let the rupee appreciate.”
Deutsche and Goldman both forecast the rupee will depreciate to about 43 per dollar in 12 months.
The currency reached 40.5225 per dollar on Tuesday, the strongest since May 1998.
The so-called risk-reversal rate for three-month options on the rupee-dollar exchange rate reached minus 0.05% on 21 May, the biggest premium for rupee calls since 2 November. It flipped back to a positive rate on Tuesday, showing a premium for puts, at 0.075%. The premium for puts has shrunk from as high as 0.9% in March. The increase in demand for rupee call options is “a reverse indicator” pointing to a drop in the currency, Stolper said.
The rupee has gained 9% this year, the most among the 15 most actively traded Asian currencies, as foreign investors boosted holdings of local stocks. The Bombay Stock Exchange’s Sensex has gained about 9% in the past two months to 14,453.72.
Asia’s fourth-largest economy will expand “around” 8.5% this year, slowing from a 9.2% rate the previous year, RBI governor Y.V. Reddy had forecast in April.
RBI , which bought a record $11.9 billion (Rs48,790 crore) of foreign currency in February, slowed purchases to $2.3 billion in March.
The strength in the currency over the last six weeks fuelled speculation that the central bank was letting the rupee gain to combat inflation, wrote Sanjeev Sanyal, senior economist at Deutsche in Singapore, in a note published on 18 May. Sanyal expects the central bank to use this approach until inflation is contained, likely by year’s end. A stronger rupee can make imports cheaper.
“The use of the currency for inflation control is unusual as RBI has historically preferred to target a certain level,” using the so-called real effective exchange rate, Sanyal wrote in the note. The real effective exchange rate is a gauge of the rupee’s value against currencies of major trading partners.
Inflation slowed to a five-month low of 5.44% in the week ended 5 May, from 5.66% the previous week. RBI’s benchmark overnight lending rate is at a five-year high of 7.75%, after five increases in the last financial year.
Rupee gains over the past few months will take about six months to feed through into export statistics, said James Malcolm, senior currency strategist at Deutsche in Singapore, in an interview.
Exports, which account for about 10% of the country’s economy, grew in March at less than half the pace of the past year. Exports increased 8.8% to $12.6 billion in March compared with a 21% increase in the year ended 31 March, the commerce ministry said on 1 May.
(Sam Nagarajan and Anoop Agrawal in Mumbai contributed to this story. )