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Business News/ Politics / Policy/  Raghuram Rajan rupee intervention seen as Wal-Mart supplier laments gains
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Raghuram Rajan rupee intervention seen as Wal-Mart supplier laments gains

Rajan said that the rupee's relative strength is pressuring margins of some exporters

The rupee has risen 1.2% against the dollar, 16.2% versus the euro and 1.9% to the yen in 2015 even as the RBI sales of the currency swell foreign reserves to a record $343 billion. Photo: BloombergPremium
The rupee has risen 1.2% against the dollar, 16.2% versus the euro and 1.9% to the yen in 2015 even as the RBI sales of the currency swell foreign reserves to a record $343 billion. Photo: Bloomberg

Mumbai/New Delhi: The top forecasters for India’s rupee see the Reserve Bank of India (RBI) stepping up intervention to counter inflows, as exporters say the currency’s strength threatens profits.

The rupee has risen 1.2% against the dollar, 16.2% versus the euro and 1.9% to the yen in 2015 even as the RBI sales of the currency swell foreign reserves to a record $343 billion. ING Groep NV, Malayan Banking Bhd and ABN Amro Group NV, the most-accurate forecasters in Bloomberg rankings, predict the rupee will drop as much as 3.5% to 64.50 a dollar by 31 December on intervention and outflows when the US raises interest rates.

“We’ll have to strive hard to protect profitability," Sunil Khandelwal, Mumbai-based chief financial officer at Alok Industries Ltd, which supplies clothing to Wal-Mart Stores Inc., said in an 9 April interview. “The RBI is significant in maintaining a balance in the market and they’re preparing to counter the inflows."

Governor Raghuram Rajan said on 7 April the rupee’s relative strength is pressuring margins of some exporters. The RBI’s gauge of the currency’s inflation-adjusted exchange rate versus India’s six largest trade partners has strengthened 24%, suggesting overvaluation. Bank of America Merrill Lynch predicts the authority will buy $62.5 billion in 12 months to check the advance.

‘Warn speculators’

“The intervention is clearly to slow down the pace of rupee appreciation to ensure exporters’ price competitiveness, and to warn speculators that one-way bets won’t be tolerated," Roy Teo, a Singapore-based strategist at ABN Amro, said in an 8 April phone interview. “The RBI will lean against the rupee," weakening it to 64 a dollar by the year-end, he said.

The central bank bought $12.1 billion in the spot market in January, the most in seven years, RBI data show, and has added reserves faster than its largest emerging-market peers.

Exports fell 15% in February from a year earlier, the biggest drop since August 2009, according to data compiled by Bloomberg, following declines in December and January. The three-month slide is longest since September 2012.

“Indian exporters are facing a very difficult situation due to rupee’s appreciation against major currencies such as the euro," S.C. Ralhan, Ludhiana, Punjab-based President of Federation of Indian Export Organizations, said by phone on 9 April. “We’re hit by high raw material costs and interest rates locally, and a global slowdown."

‘Difficult situation’

The rupee has appreciated as Rajan and Prime Minister Narendra Modi’s steps to curb inflation and spur growth lured $13 billion into local bonds and stocks this year, following record inflows of $42 billion in 2014. Signs of economic improvement prompted Moody’s Investors Service to raise its outlook on India’s debt rating to positive from stable 9 April.

The burden of high borrowing costs on exporters is an opportunity for investors. While the RBI cut its policy rate to 7.50% in two moves this year, it matches the level in Indonesia and is the highest among major Asian economies.

Borrowing in dollars to invest in rupees returned 3.4% this year, the highest among 12 Asian carry trades tracked by Bloomberg. The 10-year sovereign yield fell three basis points on Friday to 7.80%.

The central bank is likely to keep the rupee relatively stable this year as lower crude-oil prices narrow the nation’s current-account deficit and check inflation, according to Malayan Banking, which predicts the currency will end the year around 63 versus the dollar from 62.32 on 10 April. That compares with ING’s projection of 64.50 and the median forecast of 63.50 in a Bloomberg survey of strategists.

Managing volatility

The RBI’s “aim is more to ensure that excess volatility is managed rather than trying to target a level," Saktiandi Supaat, head of foreign-exchange research at Maybank in Singapore, said in an 9 April e-mail interview. “An improvement in the current-account balance as oil prices remain low, and continuation of foreign direct and portfolio inflows," will keep the rupee stable, he said.

While an eventual increase in US interest rates by the Federal Reserve will curb the rupee’s advance, according to Societe Generale SA, it won’t stop the currency from strengthening to 60 versus the dollar by the year-end.

“We’re quite confident the Fed rate hike will have minimal impact on India and it will continue to see inflows," Kunal Kundu, an economist at Societe Generale in Bengaluru, said 10 April by phone. “We don’t see the RBI intervening beyond a certain limit."

One-month implied volatility in the rupee, a measure of exchange-rate swings used to price options, has dropped 270 basis points from an eight-month high reached in January to 5.88% on Friday, data compiled by Bloomberg show.

ABN Amro says the market may have become too sanguine.

“Financial markets are underestimating the pace of rate hikes in the US," said Teo. “The rupee is definitely less vulnerable to Fed rate hikes, but it’s not immune." Bloomberg

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Published: 13 Apr 2015, 08:50 AM IST
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