Goldman Revises Rupee Forecast, Sees 3.2% Drop as Oil Rises

Goldman Sachs Group Inc. revised its forecasts for the Indian rupee, predicting a 3.2 percent drop in the next six months because rising oil costs will increase the import bill and double the nation’s current-account deficit.

The broad measure of trade that includes investment flows will widen to 3.5 percent of gross domestic product in the fiscal year ending in March, from 1.5 percent the previous year, Tushar Poddar and Pranjul Bhandari wrote in a note to clients. Goldman differs from all the other 21 economists surveyed by Bloomberg News who forecast a stronger rupee by year-end.

``The recent large move up in the dollar has caught us by surprise and appears to be driven by the run-up in oil prices,’’ wrote Mumbai-based Poddar and Bhandari, analysts at the world’s largest securities firm by market value. ``The rupee will continue to weaken.’’

The rupee traded at 42.73 per dollar as of 2:10 p.m. in Mumbai, according to data compiled by Bloomberg. Goldman changed its three-month, six-month and one-year forecasts for the rupee to 43.9, 44.1 and 42.2 from earlier estimates of 41, 40.3 and 38.9, respectively.

The median forecast of analysts and strategists surveyed by Bloomberg is for 40.5 at the end of June, 40.32 at the end of September and 39.5 at the end of 2008.

Current-Account

The rupee has declined 8 percent this year, making it the second-worst performer among the 10 most-traded Asian currencies excluding the yen. The rupee will also drop as overseas funds cut holdings of the nation’s assets, said the Goldman analysts.

India’s current-account shortfall widened to $5.4 billion in the three months ended Dec. 31 from $3.7 billion a year earlier and $4.7 billion in the preceding quarter, the central bank said on March 31. That was after the country imported oil worth $71.8 billion in the year through March 31, 23.5 percent more than a year earlier.

The share of oil imports out of the total ``will rise due to the forecasted oil price increases,’’ Poddar and Bhandari said. ``Looking at the sensitivities of import bill to oil prices suggests oil imports will grow by 85 percent in the fiscal year ending March.’’

Goldman forecasts oil to rise to as much as $141 a barrel in the second half of 2008. Crude for July delivery was at $131.79 a barrel on the New York Mercantile Exchange. It rose to an all-time high of $135.09 yesterday.

Inflation

Goldman has revised higher its estimate of annual inflation to 7.5 percent from 6.5 percent due to higher oil costs. India is Asia’s third-biggest energy consumer and imports 75 percent of its annual requirements.

``We expect monetary policy to remain on a tightening path,’’ Poddar and Bhandari said. The bias will be towards measures to absorb liquidity through reserve ratio increases rather than through rates.’’

India’s annual inflation rate held above the central bank’s 5.5 percent target for a third straight month, according to a government report today. Wholesale prices rose 7.82 percent in the week ended May 10 from a year earlier, after gaining 7.83 percent in the previous week.

The Reserve Bank of India last month twice asked lenders to set aside more funds, raising the so called cash reserve ratio to 8.25 percent, the highest since March 2001, from 7.5 percent.