Indian rupee may rise 2.5 percent in two months: HSBC

India's buoyant rupee, trading at eight-year peaks against the dollar, could climb further higher in the coming months because of surging foreign inflows into the robust economy, a leading foreign bank trader said.
The rupee has gained for three consecutive quarters, rising nearly 10 percent from a three-year low in July. It was at 42.72/42.73 a dollar on Friday, stretching gains to 3.5 percent in 2007 and making it Asia's best performing currency.
Pradeep Khanna, director and head of currency trading, treasury and capital markets at HSBC India, said the rupee was likely to rise by about 2.0-2.5 percent in the next 1-2 months.
India's economy is expected to have grown 9.2 percent in the fiscal year ended March - its fastest pace of growth in 18 years. Aggressive policy tightening by the central bank in the past few months is expected to cool the growth.
The World Bank and Asian Development Bank have forecast 2007 growth to slow to about 8 percent, roughly the average pace of expansion in the past three years. "Eight percent is good," Khanna told Reuters in an interview. "With that kind of growth, you're going to attract that kind of inflows. There's every chance the rupee will appreciate from here."
Besides foreign direct investment and portfolio equity inflows, there has been a rise in bank deposits by expatriate Indians and foreign borrowings by Indian companies. Non-resident deposits increased by $4 billion in 2006/07 while external commercial borrowings rose $14 billion, J.P. Morgan said in a recent note. India's central bank, which often tries to curb the rupee from rising too sharply, bought a record $11.9 billion in February as the rupee climbed to a 16-month high that month.
But the intervention is a double-edged sword with the rupee sales by the central bank to buy dollars boosting domestic money supply and accelerating inflation. With inflation running at well above the central bank's comfort zone of 5-5.5 percent, the monetary authority has had to tone down its intervention in the foreign exchange market and allow the rupee to rise.
"I don't think that the corporate sector has hedged their exports to the extent that they would have liked," Khanna said. "If it just continues to rise further, you'll see a scramble to start hedging exports and that will push the rupee higher."