RBI Adviser Says Rupee Needs to Weaken as Indian Exports at Risk

The Reserve Bank of India would probably favor a further retreat in the rupee, Asia’s worst-performing currency of the past week, to combat a slump in exports, an adviser to the monetary authority said.

“The rupee has appreciated in real terms and needs to weaken to 64 or maybe 65” a dollar this year, according to Ashima Goyal, a member of the central bank’s technical advisory panel that makes policy recommendations to Governor Raghuram Rajan. “Current capital inflows are excessive” and that’s fueling appreciation, she said. While the rupee lost 2.3 percent against the greenback to 62.74 in the past six months, it advanced against 13 of 16 major currencies.

Global funds have pumped $13 billion into local stocks and bonds in 2015 after buying a record $42 billion last year. An RBI gauge of the rupee’s strength against the currencies of its six largest trading partners climbed to the highest since at least 2003 in March, indicating a 25 percent overvaluation. That’s despite net dollar purchases of about $20 billion by the central bank in the spot market in January and February.

“There is a limit to how much the RBI can intervene if there are a lot of inflows,” Goyal said from Mumbai. “It’s a good thing for us that the rupee depreciates a little as it’s getting overvalued.”

Governor Rajan said April 7 the rupee’s relative strength is pressuring margins of some exporters. India’s overseas sales slumped 21 percent in March from a year earlier in the biggest drop since 2009, resulting in the trade deficit widening to a four-month high of $11.8 billion, data showed on Friday.

The rupee has strengthened about 15 percent against the euro in the past six months, while gaining about 9 percent versus the Japanese yen, data compiled by Bloomberg show. In the past week, it fell 0.6 percent against the dollar as emerging-market currencies advanced across the rest of Asia.

Improved Outlook

Overseas funds flocked to Indian assets as Prime Minister Narendra Modi’s government, which came to power in May, took steps to allow higher foreign investment in certain industries, cut red tape and boost spending on infrastructure. The outlook for the $1.9 trillion economy improved also as the plunge in Brent crude prices helped slow inflation and repair public finances. India imports about 80 percent of its oil.

The credit-rating outlook for Asia’s third-largest economy was raised to positive by Moody’s Investors Service this month and Fitch Ratings boosted its growth forecast. Gross domestic product will increase 7.5 percent in 2015, surpassing China’s rate of expansion for the first time since 1999, the International Monetary Fund predicts.

“We’re seeing a bulge in capital flows since last year because other emerging nations are not doing that well,” Goyal said, adding that India will be vulnerable to outflows once the Federal Reserve starts raising interest rates.

Reserve Ammunition

The Indian currency plummeted to a record 68.845 a dollar in August 2013 after the Fed’s signal that it would withdraw monetary stimulus triggered an exodus of funds from emerging markets.

“There would be some pressure on the rupee but it’s not going to be sharp because the RBI has so much ammunition in reserves and the India story is so good compared to other countries,” said Goyal, who teaches at the Mumbai-based Indira Gandhi Institute of Development Research.

India’s foreign-exchange reserves swelled to a record $343 billion this month. RBI Governor Rajan refrained from cutting the benchmark repurchase rate at a policy review on April 7 after reducing it in unscheduled moves in January and March to 7.5 percent as retail inflation slowed.

Consumer prices increased 5.2 percent from a year earlier in March, the smallest gain in three months, data showed last week. Goyal said the RBI has scope to lower interest rates by another 50 basis points in 2015, adding that she expects inflation to be around 5.5 percent by the end of the year.

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