India may allow rupee to rise: Barclays Capital

COCHIN— India’s central bank is likely to loosen its tight grip over the rupee and allow it to appreciate from current levels to curb inflationary pressures, a senior official at Barclays Capital said on Sunday.

By (Reuters)

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Published: Tue 16 Aug 2005, 10:28 AM

Last updated: Thu 2 Apr 2015, 4:15 PM

"Oil prices are at $65 a barrel and the government will have to increase retail prices,” Dominique Dwor-Frecaut, a director at Barclays Capital, Singapore told Reuters in an interview on the sidelines of the Forex Assembly of India.

Also, demand pressures are not yet showing up in the inflation index now, but they are building up. The Indian government is not willing to take fiscal measures such as cutting taxes on fuel products, while there is also some political pressure on the central bank to go slow on interest rate increases, Dwor-Frecaut said.

So, by default, the exchange rate is the best tool to control inflation. I think the rupee will rise to 43 against the dollar by December’s end,” she said. India’s central bank says it intervenes to curb excessive volatility in the currency market.

It has bought an estimated $5 billion in the two weeks to August 5, intervening after the partially convertible rupee rose to a six-year high of 43.12 per dollar on July 22, a day after China revalued the yuan by 2.1 per cent.

That intervention swelled reserves to $142.6 billion and the rupee has since fallen by nearly a per cent to 43.54 per dollar.

The rupee has held its ground since January despite the dollar’s rise overseas, supported by foreign fund investments of $7.2 billion this year into India’s booming stock market.

Analysts say the rupee is overvalued by nearly 9 per cent on a trade-weighted basis and expect the central bank to continue its dollar buying to keep exports competitive.

“A higher rupee will translate into cheaper imports, bringing down inflation,” Dwor-Frecaut said.

Dwor-Frecaut said there was strong demand for goods and services in Asia’s third largest economy, which is on course for 7 per cent growth for the year to March. India’s economy has expanded at an average of 7.7 per cent in the past two years.

Bank credit has grown at more than 30 per cent and industrial production expanded by 11.7 per cent in the year to June -- the fastest in nearly a decade -- as companies produced more to feed growing demand from Indian consumers.

“Under such circumstances, the central bank should raise interest rates. But they haven’t done it in July and this has left me very confused,” she said.

“It will be more difficult to tighten monetary policy later on when there is a surge in inflation.”

Last month, the central bank held the key short term interest rate steady at 5 per cent at its quarterly review, saying it wanted to ensure India’s growth momentum despite inflation worries caused by record prices of oil, India’s biggest import.

It will review policy again in October, when most analysts expect it will raise the interest rate by 25 basis points.

Inflation has dipped to 3.84 per cent, but economists expect it to rise to 5 per cent by end-December as demand pressures show up and high oil prices kick in.

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