Bank of America Corp. is bullish on India’s rupee because the central bank will raise interest rates for the first time in more than a year and will also allow the currency to strengthen to fight inflation.
The currency will advance by about 9.6 percent to 37 per dollar by year-end and the Reserve Bank of India will increase the repurchase rate to 8 percent from 7.75 percent before its next meeting on July 29, according to Bank of America’s Yeo Han Sia. Royal Bank of Scotland and Calyon are the only other banks among 21 in a Bloomberg News survey predicting the currency will rise that far.
Inflation in India, Asia’s third-largest economy, accelerated to 7.57 percent in the week ended April 19, the fastest pace since November 2004, as prices of food, crude oil and manufactured products rose. The central bank last week increased its inflation estimate to 5.5 percent for the year to March 31, from 5 percent.
``Currency appreciation is a monetary policy tool India will definitely have to explore in coming months,’’ Yeo, a strategist at Bank of America, the largest U.S. bank, said in an interview in Singapore today. ``If you have a persistent overshoot of inflation, resulting in an erosion of market confidence over the central bank and the government’s credibility to fight inflation, then the issue that develops is much more serious.’’
India has banned exports of edible oils, rice and wheat, and cut levies on imports of edible oils to secure food supplies. The government has capped retail fuel prices and last week scrapped import duties on steel products to help temper price increases.
Bank Measures
The rupee has declined 3.1 percent this year, the second- worst performance among Asia’s 10-most traded currencies excluding the yen. Weakness in the currency pushes down the cost of exports while making prices of imported goods more expensive. The rupee traded at 40.5850 as of 10:07 a.m. in Mumbai.
The central bank last week raised the percentage of cash banks must set aside to cover deposits to 8.25 percent, the highest since March 2001.
``India is witnessing imported inflation and in this situation letting the currency rise would be as good as trying to boost the domestic supply,’’ Yeo said. ``The fiscal measures taken will not be enough to temper inflation because pressures are not from the demand side. We can expect actions between monetary policy meetings.’’
The government halted futures trading in wheat and rice last year and lentils in 2006 to check a surge in domestic prices of the commodities.
India may have to suspend trading in some food futures if parliament calls for it, Finance Minister Palaniappan Chidambaram said yesterday.
``If rightly or wrongly people perceive that commodities- futures trading is contributing to a speculation-driven rise in prices, then in a democracy you will have to heed that voice,’’ Chidambaram said in an interview in Madrid.
Chidambaram says the ``tolerance’’ level of inflation in India is 4 percent.
Source:Bloomberg
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