Rupee Advance to 43 May Prompt Sales as Exporters Complain: India Credit

The Indian rupee’s 6 percent climb in the past seven weeks left the currency close to a level that may prompt the central bank to intervene in the foreign-exchange market to limit gains for the first time in 11 months.

The government is comfortable with a rate between 43 and 45 per dollar, said a Finance Ministry official with direct knowledge of the matter, who asked not to be identified because the issue is sensitive. The rupee, the second-best performer in Asia outside of Japan since Aug. 30 after South Korea’s won, fell 0.6 percent yesterday to 44.37.

Reserve Bank of India Governor Duvvuri Subbarao would join policy makers from Japan to Brazil who have sold their currencies to keep exports competitive as the global recovery loses momentum. Infosys Technologies Ltd., India’s second- biggest software exporter, said last week that volatility in the exchange rate would ‘kill’ exporters, while pharmaceutical companies such as Cipla Ltd. and IPCA Laboratories Ltd. called on the central bank to curb swings in the rupee.

“Global demand is already weak and many are starting to intervene,” Sonal Varma, a Mumbai-based economist with Nomura Holdings Inc., said in a phone interview yesterday. “We won’t be surprised if the RBI did start intervening before 43 as well.”

Currency forecasters bet India’s rupee will drop during the rest of this year and climb in 2011. The rupee will trade 0.5 percent lower at 44.60 per dollar on Dec. 31, according to the median prediction of 16 analysts surveyed by Bloomberg. The currency will advance 5.6 percent to 42 by the end of 2011, according to 13 analysts.

Don’t Panic

“We should watch the situation but it’s not a matter of concern,” Finance Minister Pranab Mukherjee said in an interview to Bloomberg-UTV on Oct. 15 in Birbhum in the eastern state of West Bengal. “We need not press the panic button.”

The central bank, which last intervened in November 2009, says that the currency’s strength will be limited by the nation’s deteriorating trade balance. Exports climbed at a rate of 22.5 percent in August, down from as much as 54.1 percent in March, according to government data. The current-account deficit widened to a record $13.7 billion in the three months through June, the Reserve Bank said Sept. 30.

“It comes down to a balancing act between making sure there’s enough money to finance your current-account deficit, but at the same time not do any serious damage to people whose competitiveness is undermined for no fault of their own,” central bank Deputy Governor Subir Gokarn said in the northern Indian city of Chandigarh said on Oct. 14.

Price Swings

Infosys said it suffers a 40-basis point drop in operating margin for every 1 percent movement in the rupee. The rupee has gained 17 percent since it slid to 51.985 in March 2009 and was as strong as 39.27 on Jan. 15, 2008, according to data compiled by Bloomberg.

“We’ve seen the rupee go from 52 to 39 and back and forth,” Infosys Chief Financial Officer V. Balakrishnan told reporters last week. “It will kill the whole export industry. The RBI has no choice but to intervene at some point in time, like every other country.”

A. K. Jain, the joint managing director of IPCA Laboratories Ltd., India’s biggest supplier of anti-malaria drugs, said the rupee gain will start hurting in a few months.

“Suddenly, 6 to 7 percent of your revenues have just gone,” Mumbai-based Jain said in an interview on Oct. 15. “Within one month, your cost structures have not come down by 7 percent.”

Bond Yields

The rupee retreated from a two year-high yesterday as refiners bought dollars to buy crude oil after a decline in the price of the commodity.

India’s 7.8 percent note due May 2020 fell, pushing the yield up 2 basis points to 8.09 percent, the highest level in more than five months, after inflation unexpectedly accelerated, according to the central bank’s trading system.

India’s 10-year bond yield is the highest among the major emerging economies except Brazil, where similar-maturity notes pay 11.59 percent. Comparable securities offer 7.34 percent in Russia and 3.29 percent in China and 2.51 percent in the U.S., according to data compiled by Bloomberg.

India’s securities returned 3.5 percent in 2010, the second-worst performance after China among 10 local-currency debt markets in Asia outside Japan, according to indexes compiled by HSBC Holdings Plc.

The difference in yields between India’s debt due in a decade and similar-maturity U.S. Treasuries widened 19 basis points this month to 558. The gap has grown from 375 at the end of 2009 and touched a record 5.6 points on Oct. 11.

Rate Swaps

The cost of one-year interest-rate swaps, a fixed payment made to receive floating rates, rose four basis points yesterday to 6.72 percent.

Nine of 10 banks surveyed by Bloomberg earlier this month said they expected the central bank to refrain from attempts to influence the exchange rate in October. Standard Chartered Plc said policy makers may take steps to reduce swings in the currency.

Option prices signal investors expect wider fluctuations in the rupee. The implied volatility on one-month dollar-rupee options has rebounded to 10.8 percent from a five-month low of 7.3 percent on Sept. 13, data compiled by Bloomberg show. Traders quote the gauge of expected swings in exchange rates as part of option prices.

Rupee Options

The rupee has “been too volatile and completely affects all our planning and strategy,” S. Radhakrishnan, the Mumbai- based Chief Financial Officer at Cipla, India’s third-biggest drugmaker by revenue, said in a phone interview on Oct. 15.

One-month options granting the right to sell the rupee against the dollar cost 0.8 percentage point more than contracts that allow purchases as of yesterday, up from a 16-month low of 0.31 percentage point reached Sept. 20. The change indicates demand increased for contracts that permit local-currency sales, data compiled by Bloomberg show. The so-called one-month 25- delta risk-reversal rate, which peaked this year in May at 6 percentage points, compares with 2.40 for Brazil’s real and 1.25 for Russia’s ruble.

Economic Growth

India’s $1.3 trillion economy may expand 8.5 percent in the year to March 31, the most in three years, the central bank forecast on July 27. Economic output grew 8.8 percent last quarter from a year earlier, the most since 2007, a government report showed Aug. 31. The Washington-based IMF raised its 2010 growth forecast for the nation’s gross domestic product on Oct. 6 to 9.7 percent from a July estimate of 9.4 percent.

“I would use this opportunity to put in place a medium- term growth strategy through productivity and infrastructure improvements rather than banking on a cheap currency,” Venkatraman Anantha Nageswaran, the Singapore-based global chief investment officer at Bank Julius Baer & Co., which oversees $140 billion, said in an interview yesterday. “This is going to be a problem that will be with us for two to three years, with the developed countries’ need for a weak currency.”

Dangerous Policy

Christian Gaier, who helps oversee the 1.33 billion euros ($1.85 billion) of the emerging-market debt managed by Erste Sparinvest KAG, said he doesn’t expect policy makers to draw a line in the sand as that would be “always dangerous.”

“India’s aim is for long-term growth and a smooth, long- term appreciation,” Gaier said in an interview yesterday. “Interventions, yes, they are possible. I don’t expect a major move such as stopping the rupee appreciation with a hard peg to the dollar, or closing the market.”

Brazil and Thailand have been selling their own currencies and taxing global investors to curb appreciation, prompting calls for the International Monetary Fund to play a greater role in monitoring capital flows and exchange-rate policy.

Thailand’s cabinet removed a tax exemption last week on foreign investment in government bonds. South Korea’s central bank began an audit this month of banks’ foreign-exchange trading to clamp down on currency speculation. In India, the government raised its cap on foreign ownership of debt by 50 percent to $30 billion last month.

Allowing the rupee to appreciate fast is “very dangerous,” A.V. Rajwade, chairman of currency consultancy A.V. Rajwade & Co. Pvt. in Mumbai, who was part of a central bank committee that suggested a plan for fuller convertibility of India’s currency, said in a phone interview yesterday. “I think they are not taking into account the impact on growth and jobs.”