India’s onshore rupee forwards rose on speculation inflation slower than 7 percent will allow the central bank to reduce interest rates at a March 19 review, boosting an economy expanding at the slowest pace in a decade.
Investors such as ING Groep NV had been concerned that consumer prices, which rose more than 10 percent in February for a third straight month, would push the benchmark inflation rate to at least 7 percent. Wholesale price-based inflation accelerated to 6.84 percent last month from 6.62 percent in January, a government report showed today.
The Reserve Bank of India will “opt for a 25 basis point cut in next week’s policy” meeting, economists at Deutsche Bank AG, including Mumbai-based Kaushik Das, predicted in a report today. “Though we are concerned that the window for policy easing could be closing if inflation pressures don’t abate further and the current-account deficit does not improve.”
Three-month onshore rupee forwards advanced 0.2 percent to 55.32 per dollar in Mumbai, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.43 versus 55.38. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
The rupee ended at 54.3675 per dollar in the spot market compared with 54.3075 yesterday, Bloomberg data show. It swung between losses of as much as 0.4 percent and gains amounting to 0.3 percent today. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 12 basis points, or 0.12 percentage point, to 9.05 percent.
India’s government predicts gross domestic product will increase 5 percent in the year through March 2013, the slowest pace since 2003. The pickup in inflation reported today is due to higher fuel costs as the government looks to reduce subsidies, Barclays Plc said in a report, adding that stripping this out would provide a number closer to 6.3 percent.
Rupee sentiment is still “fragile,” according to a report from Westpac Banking Corp. today. The shortfall in the current account, the broadest measure of trade, is expected to be “significantly higher” in the year through March 2013 from the previous period’s record 4.2 percent of GDP, Reserve Bank of India Governor Duvvuri Subbarao said Feb. 11. The gap is a “greater worry” than the fiscal deficit, Finance Minister Palaniappan Chidambaram said Feb. 28.
Chidambaram aims to narrow the budget deficit to 4.8 percent of gross domestic product in the year through March 2014 from an estimated 5.2 percent, partly by cutting subsidies. India’s trade deficit shrank to $14.9 billion in February from around $21 billion the previous month, official data showed March 11.
“There has been some very welcome, although much delayed, action on correcting both the current-account deficit and the fiscal deficit over the last six months,” Subbarao said in a speech at the London School of Economics yesterday. Economic growth has slowed and the pace of price increases is “still high and stubborn,” he said.