Rupee to hold 8-year high on reserve requirement

Mumbai: India’s rupee may strengthen to an almost eight-year high as banks buy the currency to meet the central bank’s new reserve requirement, according to a Bloomberg News survey.

Reserve Bank of India Governor Yaga Venugopal Reddy raised borrowing costs six times in 14 months and increased the amount of cash lenders must set aside to curb record loan growth and inflation, which has stayed above the central bank’s highest estimate. The rupee gained for a fifth week in the five days to 6 April, third-placed in terms of its advance in 2007 among the most-actively traded Asia-Pacific currencies.

“The liquidity situation is favouring the rupee," said Puneet Sharma, chief currency trader at state-owned Allahabad Bank in Mumbai. “I expect that situation to sustain for the next two weeks at least."

The currency last week rose 1.3% to 42.935 against the dollar, the strongest close since 3 June 1999, according to data compiled by Bloomberg. It may climb to 42.85 this week, the median estimate of 10 traders surveyed showed.

Reddy on 30 March raised the cash reserve ratio for banks to 6.5%, from 6%, starting 14 April. That will drain Rs155 billion from the economy, according to the central bank. The Reserve Bank also increased the repurchase rate, or the rate at which it lends overnight to banks, to 7.75% from 7.5%.

Any gains in the currency may be tempered by speculation importers will stock up on dollars given they can convert rupees at a cheaper rate.

“It’s an opportunity for importers to buy dollars given that the liquidity situation isn’t going to change in the near term," said M.A. Sardesai, treasurer at state-owned Bank of Maharashtra in Mumbai.

India’s imports in the 11 months through February rose 48.8% to $165 billion, widening the nation’s trade deficit to $56.9 billion from $37.6 billion a year ago, the government said on 2 April.

The deficit has been growing as individuals spend more on goods from abroad as the economy grows at a pace that is second- fastest among the world’s major economies after China.

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