Mumbai: The rupee halted a two-week slide on signs that the central bank had bought the currency as it seeks to curb the fastest inflation in 13 years.
The Indian unit strengthened on Friday as latest data showed foreign currency reserves dropped by the most in two-and-a-half years, indicating the Reserve Bank of India (RBI) bought the currency.
India’s foreign currency reserves fell by $4.97 billion (Rs21,371 crore today), the most since December 2005, indicating the central bank increased dollar sales in the currency market. The rupee’s decline to the lowest level in 14 months last week threatened to boost the cost of imported commodities, including crude oil. Inflation quickened to 11.05% in the first week of this month, the fastest since 1995, the government said on Friday.
“The rupee may gain on expectations that the central bank will intervene in the market to support it” to curb inflation, said Sudarshan Bhatt, chief currency trader at state-owned Corporation Bank in Mumbai. The rupee rose 0.1% to 42.925 per dollar in Mumbai, according to Bloomberg data. It was little changed from a week ago.
Central banks intervene in currency markets by arranging purchases or sales of foreign exchange. RBI doesn’t comment on daily rupee movements and foreign exchange operations, according to spokeswoman Alpana Killawala. The rupee’s gains were limited by speculation that near-record oil prices will boost India’s import bill, widening its trade and current account deficits.
The price of crude oil almost doubled in the past 12 months to reach a record $139.89 per barrel this week in New York. India imports 70% of its oil requirements. The rupee has this year erased more than two-thirds of 2007’s 12.3% advance, which was the biggest in more than three decades.
“Because global crude oil prices are hovering so high, there will be pressure on the trade deficit,” said Rupa Rege Nitsure, chief economist at state-owned Bank of Baroda in Mumbai. “That will widen our current account deficit, creating a downward bias in the rupee,” she added.
India’s oil imports averaged $7.7 billion a month this year, compared with $5.4 billion in 2007, government data shows.