Rupee Climbs to 1-Month High as India Eases Diesel Price Control

India’s rupee rose to a one-month high after the government allowed state refiners to gradually increase diesel prices, a move that may help rein in energy subsidies and shore up public finances.

The currency rallied the most since November as Oil Secretary G.C. Chaturvedi said in New Delhi petroleum companies have been permitted to adjust prices of the fuel over a period of time. Finance Minister Palaniappan Chidambaram is seeking to cut spending on subsidies as part of a plan to narrow the budget deficit to 5.3 percent of gross domestic product and avoid a downgrade in the sovereign debt rating.

Any drop in subsidies “should decrease the public debt and improve the trade balance,” said Sean Yokota, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. “I am positive on the rupee for the year.”

The rupee rose 0.6 percent to 54.39 per dollar in Mumbai, according to data compiled by Bloomberg. It touched 54.225 earlier, the strongest level since Dec. 13. One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, rose five basis points to 9.80 percent. The currency will rise to 51 by year-end, Yokota predicts.

Indian refiners are losing 9.6 rupees (18 cents) on each liter of diesel they sell, according to oil ministry data.

‘Difficult Decisions’

“This is by far the single biggest endorsement to the world that India is taking the difficult decisions to restore growth,” said Abhay Laijawala, the Mumbai-based managing director and head of research at Deutsche Equities India Pvt. “This is a big positive from the point of view of the fiscal deficit for the next year.”

Prime Minister Manmohan Singh has stepped up efforts to improve government finances since mid-September, when he raised diesel prices for the first time in 14 months. He also allowed more foreign investment in industries including aviation and retailing. The measures came after Standard & Poor’s and Fitch Ratings lowered India’s sovereign credit outlook, citing a widening budget deficit and slower economic growth. Both firms rank India’s debt BBB-, the lowest investment grade.

Offshore forwards indicate the rupee will trade at 55.14 to the dollar in three months, compared with expectations of 55.68 yesterday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

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