Bloomberg News

Rupee Gains on Speculation RBI Will Raise Rates, Boosting Yields

October 24, 2011

Oct. 24 (Bloomberg) -- India’s rupee strengthened the most in two weeks on speculation the central bank will raise interest rates tomorrow for a seventh time this year, boosting the yield advantage on local assets.

The Reserve Bank of India will raise its repurchase rate by 25 basis points, or 0.25 percentage point, to 8.50 percent, according to 18 of 28 economists in a Bloomberg News survey. Overseas funds pumped $4.4 billion into local bonds this year, boosting holdings to a record last month, as the extra yield on 10-year sovereign notes rose 201 basis points to 663 over U.S. Treasuries. The rupee gained on optimism European policy makers are making progress toward containing the region’s debt crisis.

“Today’s rupee move is the result of temporary positive sentiment resulting from European talks and also a view ahead of tomorrow’s expected rate hike,” said Krishnamurthy Harihar, treasurer at FirstRand Ltd. in Mumbai. “If Europe disappoints then fundamentals such as India’s trade deficit will come into focus, pressuring the rupee.”

The rupee strengthened 0.4 percent to 49.8313 per dollar in Mumbai, according to data compiled by Bloomberg, the biggest gain since Oct. 12. It touched 50.3237 on Oct. 21, the lowest level since April 2009.

India’s challenge to contain inflation “remains significant” and the weakening of the rupee has emerged as a “new source” for price pressures, the central bank said today, signaling the need for higher interest rates.

The RBI 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.

Revamped Strategy

At an Oct. 23 meeting in Brussels, Europe’s 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.

Foreign-exchange strategists have ceased cutting forecasts for the euro as European government officials intensify efforts to end the region’s crisis and traders pare bets for a collapse in the currency.

Offshore forwards indicate the rupee will trade at 50.69 to the dollar in three months, compared with expectations for a rate of 50.96 on Oct. 21. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

--Editors: Abhay Singh, Anil Varma

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net

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


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