RBI may Step in to Halt Rupee Rise.

The Reserve Bank of India (RBI) may intervene to prevent the rupee from appreciating if it strengthens to Rs 43 or Rs 44 to a dollar, according to primary dealers and bank economists.

On Friday, the rupee soared to a five-month high against the dollar to close at Rs 44.48, after touching a day’s high of Rs 44.4650, the strongest since April 30.

The market is expecting the rupee to still appreciate to Rs 44 in the third quarter and further to Rs 43.5 in the fourth, say bankers tracking the currency. If the rupee appreciates very strongly, it will adversely impact the competitiveness of Indian exports.

“In the past RBI has intervened at levels of Rs 43 to Rs 44. We think that the possibility of RBI intervention is quite strong if the rupee were to appreciate further,” according to a research report circulated by IDBI Gilts.

A further strengthening of the rupee could pose problems as liquidity is already tight, says the report. The rupee has gained because of increased flows of non-resident Indian deposits to India in the first quarter of 2010-11, large foreign flows of funds from foreign institutional investors (FIIs) to the equity market, and higher exposures in the debt market to take advantage of the interest rate differential as the US and European economies follow a loose monetary policy with an extended period of low interest regimes.

The total capital flows in the quarter were $17.5 billion.

“Going forward we expect the capital flows to be much stronger. Foreign Institutional Investor (FII) inflows for the second quarter are around $15 billion in comparison to $3.5 billion in corresponding period last year. Captial flows are going to be much higher due to the growth and interest rate differentials between India and countries like US, Europe and Japan,” said GA Tadas, chief executive officer and managing director of IDBI Gilts.

Though the current account deficit widened to $13.7 billion in the first quarter led by a surge in imports, the capital account surplus offset the deficit.

“The capital account surplus increased significantly over the corresponding quarter of the last year mainly due to short-term credit following an increase in imports, external commercial borrowings (ECBs), external assistance and banking capital,” Deepali Bhargava, economist at ING Vysa Bank, said in a research report.

The banking capital component of the capital account recorded net inflows of $4 billion during the quarter (against net outflows of $3.4 billion in the same quarter last year) mainly due to net inflows under NRI deposits and overseas foreign currency borrowings of banks.

Many banks raised funds from abroad during the financial year, including State Bank of India ($1 billion), ICICI Bank ($500 million) and IDBI Bank (around $500 million).

Source : mydigitalfc.com