Bloomberg News

Rupee to Rebound 3 Percent From 30-Month Low on Rates, SEB Says

October 21, 2011

Oct. 21 (Bloomberg) -- India’s rupee, the worst-performing currency in Asia this year, will rebound more than 3 percent from a 2 1/2-year low touched today as the central bank raises interest rates, according to Skandinaviska Enskilda Banken AB.

Investors should buy the currency once it falls to 50.30 per dollar, targeting a “near-term” advance to 48.60, the Swedish lender said in a research note today. The rupee fell as much as 0.9 percent to 50.245 today, the weakest level since April 2009, amid speculation Europe’s debt crisis will hurt the region’s economies, data compiled by Bloomberg show. The rupee may pare the losses as European policy makers make progress in resolving the region’s credit problems, according to SEB.

The Reserve Bank of India will raise its benchmark rate to 8.50 percent from 8.25 percent at a meeting on Oct. 25, according to 13 of 19 economists in a Bloomberg survey. Six predicted no change. The central bank lifted borrowing costs six times so far in 2011 to cool inflation, boosting the yield advantage on local assets. Rates on 10-year sovereign notes climbed to a three-year high of 8.84 percent today, widening the extra yield over Treasuries to 6.6 percentage points.

“We expect improvements in risk sentiment in the near-term on back of our view that EU policy makers will not disappoint the market significantly and macro data will surprise on the upside in Asia in the near-term,” Sailesh K. Jha and Bharti Bhargava, Singapore-based analysts at SEB, wrote. “In addition, RBI credit policy review will also help” strengthen the rupee, they said.

Worst Performer

Investors should quit the trade if the rupee weakens to 50.8, according to Jha and Bhargava. The Indian currency has declined 11 percent this year, the most among Asia’s 10 most- traded currencies. It fell past 50 today for the first time since May 2009 and lost 2.5 percent this month.

France and Germany’s finance ministers will meet in Brussels today to lay the groundwork for an Oct. 23 summit of European policy makers that will consider solutions to the debt crisis. Another summit for Oct. 26 was set yesterday after Germany and France said the EU needs more time to seal a “global and ambitious” accord.

The Reserve Bank’s repurchase rate will rise to 9 percent by March next year as India struggles to contain the fastest inflation among Asia’s 10 biggest economies, Jha, who is head of Asia market strategy at SEB, said in a phone interview today. Gains in the wholesale-price index have averaged 9.6 percent so far in 2011, government data show.

The rupee weakness this month was driven by factors including capital outflows from the local stock market and an increase in dollar demand from the nation’s oil importers, which will reverse in the next few weeks, SEB said in the report.

--Editors: Anil Varma, Andrew Janes

%INR

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.


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