Indian Rupee to Gain This Year as RBI Raises Rates, Fortis Says

By Anoop Agrawal

July 29 (Bloomberg) -- India's rupee will gain by 5 percent in the rest of this year as the central bank raises interest rates to combat inflation running at the fastest pace in 13 years, according to Fortis Bank SA.

The currency will advance in the third and fourth quarters after having declined 1.8 percent during the first half, as the central bank adds to its two rate increases from last month, said Joseph Tan, a senior market strategist at Fortis. The central bank today will raise interest rates to 8.75 percent from 8.5 percent, according to the median estimate of 22 economists surveyed by Bloomberg News.

``The rupee is still struggling and it will benefit from a rate increase,'' Singapore-based Tan said in a telephone interview. ``Given the potential risks to inflation, the central bank will not take any chances.''

The rupee ended yesterday at 42.545 per dollar, according to data compiled by Bloomberg. The currency will rise to 41.5 by Sept. 30 and to 40.5 by Dec. 31, the highest since April. The rupee is the second-worst performer this year among the 10 most- traded currencies in Asia excluding the yen.

Wholesale prices rose 11.89 percent in the week to July 12, after gaining 11.91 percent in the previous week, the commerce ministry said in New Delhi on July 24. Inflation is twice as high as the central bank's goal.

To contain inflation, the central bank raised its benchmark rate to a more-than-six-year high in June. It also increased to 8.75 percent the cash reserve ratio, the proportion of deposits banks must set aside as reserves.

``The central bank has scope to flex its muscles in the currency market,'' Tan said. ``As long as rates are being raised investors are certain that inflation is being checked.''

To contact the reporter on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net.