India Rate Action Won't Stem Rupee Fall, Goldman Says

By Patricia Lui

June 25 (Bloomberg) -- India's decision to raise interest rates by the most since 2000 will fail to reverse the rupee's slide as the nation's current-account deficit widens on oil import costs, according to Goldman Sachs Group Inc.

The Reserve Bank of India raised its key repurchase rate for the second time in two weeks yesterday and signaled more will follow as oil's rally to a record this month pushed the inflation rate to the highest in 13 years. The rupee's 6.3 percent decline this quarter made it the second-worst performer among Asia's 10 most-active currencies excluding the yen.

``Given India's increasing current account deficit, high dependence on oil imports and inflation concerns, we expect the rupee to continue to weaken,'' wrote Tushar Poddar and Pranjul Bhandari, Goldman's Mumbai-based analysts, in a note yesterday.

The rupee strengthened 0.4 percent to 42.7910 against the dollar as at 12:24 p.m. in Mumbai, according to data compiled by Bloomberg. Goldman retained its forecast for the rupee to fall 2.5 percent against the dollar to 43.9 in three months and to 44.1 in six months.

The Reserve Bank raised the repurchase rate by 0.5 percentage point late yesterday to 8.5 percent and increased the cash-reserve ratio by a similar amount to 8.75 percent. On June 11, the central bank had raised the repurchase rate by 0.25 percentage point for the first time in 15 months, as the wholesale price index jumped 11.05 percent in the first week of June, the most since May 1995.

Selling Equities

Global funds, spooked by accelerating inflation, have dumped $6.3 billion more Indian shares than they bought this year, compared with a record net purchase of $17.2 billion in 2007. The benchmark Bombay Stock Exchange Sensitive Index, or Sensex, has slumped 30 percent in 2008, following a 47 percent advance last year.

``We remain bearish on rupee's medium-term prospects, owing to the continued pressure on the current account and simultaneous slowdown in net capital flows,'' JPMorgan Chase & Co.'s analysts Vikas Agarwal and Siddharth Mathur wrote in a research report yesterday. ``Likely bearish equity market reaction to the central bank's strong-dosage prescription could trigger withdrawals by foreign investors.''

The central bank's actions are ``positive'' and ``welcome'' moves, Goldman and JPMorgan said.

``The rupee may gain a brief reprieve,'' Mumbai-based Agarwal and Singapore-based Mathur said, as the higher cost of funds and the central bank's intervention to support the currency will ``temporarily soften the upward pressure on the dollar against the rupee.''

The Reserve Bank will likely raise the repurchase rate and cash reserve ratio again this year to rein in price pressures, the analysts at both the banks predicted.

JPMorgan also kept its forecast for the rupee to weaken to 45 a dollar by the end of the third quarter and to stay there until year-end.

To contact the report on this story: Patricia Lui in Singapore at plui4@bloomberg.net.