Citigroup says proposed curbs on PNs won’t arrest rupee rise

Citigroup says proposed curbs on PNs won’t arrest rupee rise

New Delhi: India’s plan to restrict money coming into the stock market may fail to cap the rupee’s gains as the pace of economic growth will keep attracting funds from overseas,Citigroup Inc. said.

Citigroup, the world’s third biggest trader of foreign exchange, is sticking with its rupee forecast of 39 to the dollar by the end of March, Rohini Malkani, the bank’s Mumbai-based analyst, wrote in a research note on Wednesday. Surging capital inflows will make up for any slowdown in portfolio flows, keeping the country’s balance of payments in surplus, she said.

The Securities and Exchange Board of India (Sebi) on 16 October suggested foreign institutional investors (FII) shouldn’t be allowed to issue or renew offshore derivative instruments linked to futures and options.

It wants the so-called participatory notes sold within 18 months. Holders of the notes need to respond to the proposals by 20 October.

“While the proposed measures will have a temporary impact on flows, they are unlikely to reverse the rupee appreciation story," Malkani said. “Strong growth" is one domestic factor supporting rupee gains.

The currency dropped as much as 1.6% on Wednesday to 39.97 against the dollar before closing 0.5% lower at 39.565 in Mumbai. The rupee slipped more than 0.5% on Thursday to close at 39.77 against the dollar. Citigroup predicts the currency will average 38 in 2008.

India’s benchmark Bombay Stock Exchange (BSE) Sensitive Index, or Sensex, ended 1.8% lower on Wednesday after dropping as much as 9.2%, a loss that triggered a one-hour suspension in trading on the bourse.

Asia’s third biggest economy will expand 9.3% in the year ending 31 March, following growth of 9.4% last year, which was the fastest pace in almost two decades, Citigroup said.

The country’s capital account may show a surplus of $42.5 billion (Rs1.68 trillion) this fiscal year, with an overall surplus of $27.8 billion, according to Citigroup’s estimates. “The capital controls are unlikely to stop the tide of ‘hot money’ coming into India," Stewart Newnham, a Hong Kong-based analyst at Morgan Stanley, wrote in a research note. “The Indian authorities will fail to prevent the rupee from appreciating just as the Thai authorities have failed in capping the baht."

Thailand’s central bank in December imposed restrictions on investment by foreigners to cool gains in the baht, triggering the stock market’s steepest slide in 16 years and prompting a reversal of the rules for equity investors within 24 hours.

Most curbs were removed in March for overseas investors taking hedging measures to avoid profiting from baht fluctuations. The Reserve Bank of India (RBI) bought almost $40 billion in the currency market in the eight months through August, a record, to slow the pace of the rupee’s gains, according to central bank data.

The rupee, which has gained more than 12% this year, is the second best performer in the Asia-Pacific region, on course for the biggest annual advance since at least 1974.