Re at 1-year high as RBI signals rate increase

The Reserve Bank of India’s (RBI’s) signal on raising interest rate to manage inflation pushed the rupee to a one-year high against the US dollar.

Dealers said RBI governor D Subbarao’s speech at IMF-World Bank meet in Istambul indicated that the monetary policy would be aimed at managing inflation, which in turn would benefit the Indian currency. Since the issue of inflation is going to persist, the rupee has scope to accelerate its advances.

The rupee strengthened considerably to close at Rs 46.89 against the greenback. The forward premium hardened across all tenors. The six-month forward premium was at 3.18 per cent.

Growth concerns warranted a delayed exit from an accommodative monetary policy, while inflation pointed to an earlier exit, Subbarao said.

A dealer with a foreign bank said that higher interest rates were one of the main reasons why we were more bullish than the consensus on the rupee. Rising inflation should also incite the Reserve Bank of India to tolerate more currency appreciation.

The resultant larger interest differential may attract larger capital inflows. The Reserve Bank of India has cut its repurchase rate six times since October. The central bank predicts inflation to touch 5 per cent by the end of March 2010 from 0.83 per cent in the week ended September 19.

The surge in portfolio investments in the Indian stock market has contributed to the appreciation of the rupee. Overseas funds purchased $12.5 billion more of Indian shares than they sold this year, following a record net sales of $13.3 billion in 2008, according to data provided by the Securities & Exchange Board of India.

Offshore contracts indicated that the rupee would trade at 46.93 a dollar in a month, compared with expectations for a rate of 48.17 a week ago.

The most actively traded currency future contract on the National Stock Exchange was for October 28, 2009. The last traded price for this contract was Rs 46.9675.