RBI seen using rupee to tame inflation

RBI seen using rupee to tame inflation

Mumbai: India’s central bank will allow the rupee to strengthen in order to reduce the cost of imports and curb inflation without raising borrowing costs, Goldman Sachs and HDFC Bank Ltd said.

The rupee will advance 1.8% to a seven-month high of 47.3 per dollar by the year end, helping Asia’s third largest economy save on costs of buying crude oil and sugar, Goldman Sachs economist Tushar Poddar said in an interview.

Curbing inflation is crucial for policymakers as higher prices reduce purchasing power in a nation where about 75% of the 1.2 billion people survive on less than $2 a day.

“The exchange rate is a tool available and will go some way in taming inflationary expectations," Poddar said. “A stronger rupee may give the central bank headroom in using other monetary policy tools more effectively."

India has been intervening to prevent gains in its currency from hurting exporters, even as the benchmark Sensex share index has climbed 76% this year on signs of an economic recovery. Foreign exchange reserves have risen $25 billion in 2009 to $281 billion, according to the latest data from the central bank.

The rupee has strengthened 1.2% this year, lagging the 12% gain in the Indonesian rupiah and the 4.1% advance in the South Korean won. It closed at 48.14 per dollar on 18 September. The median estimate of 27 strategists surveyed by Bloomberg is for it to end the year at 47.25.

India’s wholesale prices rose for the first time in 14 weeks as a nascent global economic recovery pushed up the cost of commodities and manufactured goods. The benchmark wholesale price index climbed 0.12% in the week to 5 September from a year earlier, after retreating 0.12% in the previous week, the government said on 17 September.

“In the short-term the exchange rate can be used to curb inflationary expectations without affecting competitiveness," Abheek Barua, chief economist at HDFC Bank said in an interview on Sunday. “And the central bank will move in this direction sooner than later."