Mumbai: India’s central bank is likely to step up dollar buying in the currency market and knock the rupee off a nine-year peak, as slowing inflation gives it more elbow room to intervene, Kotak Mahindra Bank said on Wednesday.
The Reserve Bank of India (RBI) has refrained from heavy intervention recently, allowing the rupee to gain about 9% against the dollar so far in 2007, hitting a nine-year peak of 40.50 on Monday.
Analysts say the RBI’s hands-off approach was prompted by cash-fuelled inflation, which was further stoked by its aggressive intervention earlier this year.
But, Kotak said, the currency was now overvalued by 16% and the nation’s export growth was slowing, creating conditions for the central bank to re-enter the market.
This could drive the rupee down to about 41.10 by the middle of July, it said.
“Accepting that currency appreciation was used as a tool to contain inflation, RBI could come back into the market to prevent sharp appreciations in the Indian unit once inflation cools off,” Indranil Pan and Kaushik Das, economists at the bank, said.
A temporary spike in the rupee in the near-term, however, could not be ruled out, they added.
India’s wholesale price index rose 5.44% in the 12 months to 5 May, lower from the previous week’s 5.66%, and falling within the central bank’s target for the first time in five months.
Concerned about a widening trade deficit and the potential for a sudden reversal of capital inflows, the RBI has kept the rupee in a broad range of 43.00 to 47.00 per dollar in the past three years.
But strong economic growth and a booming stock market have attracted huge capital inflows, spurring the central bank to buy $22 billion (Rs89,250 crore) in the four months to end-March 2007, in a bid to stem the local currency’s rise.
Kotak Mahindra Bank expects the RBI to purchase $18.5 billion in the fiscal year ending in March 2008, in order to sustain annual GDP growth of 8.5%.