Rupee gains on fall in WPI inflation, dollar sales

Market participants say current slide temporary, outlook for inflows positive

A fall in Wholesale Price Index (WPI)-based inflation, coupled with dollar sales by exporters, helped the rupee strengthen against the dollar on Friday. However, this was the fourth consecutive week during which the rupee weakened; this week, it fell one per cent against the dollar.

In May, WPI-based inflation stood at 4.7 per cent, against 4.89 per cent in April. This was the second month that headline inflation remained in the central bank’s comfort zone of four to five per cent. A revision in the factory output data for April from two per cent to 2.3 per cent also aided the rupee’s rise. On Friday, the BSE Sensex rose 1.8 per cent, and this, too, helped the rupee.

The rupee closed at 57.53 a dollar on Friday, compared with 57.79 yesterday. Earlier this week, it had touched an all-time intra-day low of 58.99/dollar, prompting the Reserve Bank of India to ask state-run banks to sell dollars to arrest the slide.

Some market participants said the worst might be over for the rupee. “The current account deficit is likely to correct substantially, as the cost of importing gold and oil is declining, weak growth and policy measures are lowering import demand, and rising real interest rates are reducing the need to hedge against inflation through capital flight,” Deutsche Bank economists said in a note. They added the outlook for inflows was broadly positive, as a number of disinvestment programmes were in the pipeline and a rate cut cycle was likely to keep fixed-income investors interested.

Since the beginning of May, the country’s worsening external position, coupled with global uncertainties, have weakened the rupee by eight per cent. Since June 1, the rupee has fallen 1.8 per cent.

“We believe the current slide would be temporary and the rupee would strengthen. However, it would be interesting to see how inflation would behave if the rupee ends 2013-14 at 57/dollar, against our current expectations of 54,” rating agency CRISIL said in a report.