Indian Rupee to Climb 9%, Interest Rates to Rise, Fortis Says

India’s rupee will rise 9 percent through to the end of the year as the central bank raises borrowing costs by July to fight inflation at the fastest pace in 3 1/2 years, Fortis Bank SA said.

The currency will rebound from its lowest in 13 months as the Reserve Bank of India increases the repurchase rate to 8 percent from 7.75 percent before its next meeting on July 29, according to Fortis Bank’s Joseph Tan. The bank is among all 21 respondents in a Bloomberg News survey predicting the currency to rise in 2008. The rupee is the second-worst performer this year among the 10 most-traded currencies excluding the yen.

``Economic growth is pretty much intact but inflation is a new threat and there is no scope for the central bank to have a neutral monetary policy approach,’’ Fortis Bank’s Singapore- based strategist Tan said in an interview. ``I am leaning towards believing that the central bank will tighten monetary policy further, despite what the economy is going through, and will also use the exchange rate.’’

The rupee dropped to as low as 43.21 against the dollar yesterday, the lowest since April 3, 2007, before closing at 42.965 in Mumbai, according to data compiled by Bloomberg. It may rise to as high as 39.4 at the end of this year, Fortis predicts.

Inflation accelerated to 7.83 percent in the week ended May 3, the fastest pace since November 2004, as crude oil rose to a record. The central bank last month increased its inflation estimate to 5.5 percent for the year to March 31, from 5 percent.

India’s Growth

``Economic growth should be the main concern only for the U.S. and for the rest of Asia should be inflation,’’ Tan said.

Growth may decelerate to about 8 percent, the slowest since 2005, in the fiscal year that started April 1, according to Finance Minister Palaniappan Chidambaram. The economy expanded 8.7 percent in the 12 months through March, slower than the 9.6 percent growth in the previous year.

India expanded an average 8.7 percent a year since 2003, second only to China among the world’s 20 largest economies. The central bank forecast the $912 billion economy will grow as much as 8.5 percent in the 12 months through March 2009.

The Reserve Bank last month raised for a second time this year the percentage of cash banks must set aside to cover deposits to 8.25 percent, beginning tomorrow, the highest since March 2001. Tan expects the measure, known as the cash reserve ratio, to be raised again by July.

The rupee’s rise will be supported by the easing global credit market slump prompting investments in emerging-market economies, Tan said.

``We must understand that we had more of a crisis of confidence more than a liquidity problem,’’ Tan said.

The world’s largest banks and securities firms have reported more than $300 billion of writedowns and credit losses from defaults in U.S. subprime mortgages.