Oct. 24 (Bloomberg) -- India’s central bank should intervene in the currency market to limit the drop in the rupee, Asia’s worst-performing currency this year, and help cool inflation, according to CLSA Asia-Pacific Markets.
The rupee fell past the 50 per dollar level on Oct. 21 for the first time in more than two years, and has dropped 10.3 percent this year amid speculation Europe’s debt crisis will hurt the region’s economies, data compiled by Bloomberg show. The currency could weaken to 51 or even 52 a dollar if the Reserve Bank of India doesn’t step in and capital flows stay weak, Rajeev Malik, a senior economist at CLSA, wrote in a report published today.
The RBI will raise its benchmark rate to 8.50 percent from 8.25 percent tomorrow, according to 18 of 28 economists in a Bloomberg survey. Ten predict no change. This would be the seventh increase in borrowing costs this year as the central bank looks to cool inflation that has stayed above 9 percent for ten consecutive months. A 10 percent depreciation of the exchange rate increases wholesale price-based inflation by 0.4 percent in the short term, according to a note from Yes Bank Ltd.
“It would be sensible for the RBI to intervene in the currency market to break the firming of expectations on further rupee depreciation,” CLSA’s Singapore-based Malik wrote. “In fact, it would be self-defeating for RBI to allow further rupee weakness that is more than the decline in the price of commodities and then hike interest rates to check inflation.”
The RBI forecasts the nation’s inflation rate will slow to 7 percent by March. Brent crude oil prices have dropped 1.9 percent since June, according to data compiled by Bloomberg. India imports 80 percent of its oil requirements.
CLSA predicts the rupee will rebound to between 46 and 47 a dollar next year, supported by an improvement in global risk appetite and a possible increase in the amount overseas investors are allowed to invest in sovereign-rupee debt. “Further measures by the RBI to improve dollar liquidity cannot be ruled out,” Malik wrote.
The rupee weakness this month was driven by India-specific factors such as a current-account deficit, according to the report, while the depreciation in September was in line with global risk aversion, as investors sold emerging-market assets in favor of the relative safety of the dollar.
The shortfall in the current account, the broadest measure of trade and investment flows, widened to $14.1 billion in the April through June period from $5.4 billion the previous quarter, the central bank said on Sept. 30. CLSA expects the deficit to widen to 3 percent of gross domestic product in the year ending March 31 from 2.6 percent the previous year.
The rupee gained for the first time in three days today, advancing 0.4 percent to 49.8525 a dollar as of 11:58 a.m. in Mumbai. European leaders ruled out tapping the European Central Bank’s balance sheet to boost the region’s rescue fund and outlined plans to aid banks, inching toward a revamped strategy to contain the Greece-fueled debt crisis.
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