Indian Rupee May Fall on Currency Sales

The Indian rupee, the best-performing Asian currency this year, may decline as the central bank sells it to protect the nation's exporters, a survey of traders shows.

A slowdown in the pace of inflation to an eight-month low may give the Reserve Bank of India room to buy more dollars, after scaling back such purchases in March and April. The rupee gained 9.1 percent this year to a nine-year high, helping reduce the cost of imports and pressure for price increases.

``After the latest inflation data, the central bank is in a much better position to intervene and halt the rupee's gain,'' said Vikas Babu, a currency trader at state-owned Andhra Bank in Mumbai. Refiners may also increase dollar purchases as they settle month-end import bills, he said.

The currency climbed 0.1 percent to 40.55 per dollar as of 12:11 p.m. in Mumbai, according to data compiled by Bloomberg. The rupee gave up a gain of as much as 0.8 percent to 40.2850, the highest since May 21, 1998, prompting speculation that the central bank sold the currency to stop its advance.

The rupee may retreat to 40.75 against the dollar this week, the median estimate of 10 traders surveyed by Bloomberg News showed. Deutsche Bank AG and Goldman Sachs Group Inc. last week both forecast the rupee will weaken to about 43 per dollar in 12 months.

Slower Inflation

The central bank, after buying a record $11.9 billion of dollars in February, has slowed its purchases on concern intervention will add rupees to the financial system, fueling inflation. The Reserve Bank bought $2.3 billion in March, data on its Web site show. It added about $4.9 billion to foreign- exchange reserves in April, part of which was through acquiring U.S. currency.

Wholesale price inflation in the week ended May 12 slowed to 5.27 percent, the lowest since September, a government report showed last week. The rate reached a two-year high of 6.69 percent at the end of January.

Slowing inflation also eases pressure on the central bank to raise interest rates. The benchmark overnight lending rate is at a five-year high of 7.75 percent, after five increases in the past year.

Exports, which make up about 12 percent of India's $854 billion economy, have slowed. Overseas shipments rose 8.8 percent in March from a year earlier, lagging the 21 percent increase for the year ended March 31, the Ministry of Commerce and Industry said May 1.

Plea for Intervention

The Ministry of Commerce and Industry has sought Prime Minister Manmohan Singh's ``intervention'' to protect exporters, Shipra Biswas, the ministry's spokeswoman said on May 9. Tata Consultancy Services Ltd., India's largest computer-services provider, last month said a rising currency will erode earnings.

The slowdown in exports is cooling the world's second- fastest growing major economy. Gross domestic product expanded 8.5 percent in the fiscal year ending March 31, after growing 9.2 percent last year, the central bank estimates.

The rupee is the best performer this year among the 16 most-actively traded Asian currencies as global funds bought $3.7 billion more of Indian shares than they sold in the year to May 24, exceeding net purchases in the same period last year of about $2.9 billion. Foreign direct investment tripled to $15.7 billion in the year ended March 31.

`Attractive Destination'

Such inflows may overwhelm the central bank's efforts to stem the advance. The currency may gain to 39 in the coming two months as scheduled share sales attract investment, said Vikas Agarwal, a Mumbai-based strategist at JPMorgan Chase & Co.

``India is still an attractive destination for capital looking for higher returns,'' said Agarwal. JPMorgan estimates capital flows, including direct investment, to exceed $5 billion in the next eight weeks.

DLF Ltd., a real estate developer, plans to sell as much as 96.3 billion rupees ($2.4 billion) of shares starting June 11. ICICI Bank Ltd., the country's biggest lender by market value, next month plans to raise about $5 billion.

Options traders have started to bet on the central bank stepping up sales of the currency. Indian rupee implied volatility, a measure of traders' expectations for price swings, has declined in the past month. Volatility on one-month rupee options is 7.50 percent, down from 9.5 percent on April 25, the highest since at least May 2003.

The Reserve Bank of India's determination to weaken the rupee will determine the currency's performance, said L.V. Prasad, chief currency trader at IndusInd Bank Ltd. in Mumbai.

``The RBI has been intervening and it depends on how long they can hold on to the support they are providing to the dollar,'' said Prasad.