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Indian Rupee May Drop on Concern Rate Gap With U.S. May Narrow |
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Wednesday, June 16, 2004 |
 June 14 (Bloomberg) -- The rupee may fall this week against the dollar on speculation the attraction of India's higher interest rates compared with the U.S. will fade as the Federal Reserve prepares to raise rates faster than some expected.
The Fed's statement last month that it may raise its 1 percent interest-rate target at a ``measured'' pace is ``more of a plan than a pledge,'' said Fed bank of Atlanta President Jack Guynn, echoing remarks last week by officials including Chairman Alan Greenspan. India's benchmark interest rate is 4.5 percent. A narrower gap would cut the yield advantage on Indian debt.
``The concern is how far and how fast will the Fed increase rates,'' said Krishnamurthy Jayram, chief currency trader in Mumbai at Calyon, the capital markets unit of Credit Agricole SA. ``Rupee assets won't be as attractive as they were earlier.''
India's currency may decline 0.1 percent to 45.20 against the dollar this week, from 45.15 late on Friday, according to the median estimate of six traders surveyed by Bloomberg News. Jayram said the rupee may drop to as low as 45.25 per dollar.
The Reserve Bank of India kept its benchmark interest rate, which determines the rate it drains funds from the banking system for a set period, unchanged at 4.5 percent at its last policy announcement on May 18.
India's 7.37 percent bond maturing in 2014 yielded 5.33 percent late Friday in Mumbai, 0.53 percentage point more than the yield on the 4 3/4 U.S. Treasury note maturing in May 2014, according to the New York-based bond broker Cantor Fitzgerald LP. The yield advantage shrank from 0.95 percentage point two weeks before.
Yield Gap Shrinks
Overseas Indian investment in the country's debt may fall as the yield gap narrows, said analysts including Surendra Rosha, head of sales at HSBC Ltd. in Mumbai.
``The yield differential between the dollar and the rest of the world is coming off'' and may cause the rupee to drop. ``The U.S. outlook is weighing on the rupee.'' The currency may decline to as low as 45.30 per dollar, he said.
Dollar bank deposits held by overseas Indians accounted for $3.5 billion of the central bank's increase in reserves in the nine months to December, the second-biggest contributor to reserves, the monetary authority said March 31.
Indians abroad had outstanding bank deposits of $28.53 billion on Dec. 31, 2003, about a quarter of the country's currency reserves, a central bank report said last month.
The rupee may also decline on concern the new Congress-party led government may raise taxes, and introduce policies that discourage overseas investment, in its annual budget expected to be presented to parliament in the first week of July, according to analysts including Jayram.
Budget Concern
``There could be selling of rupees, because we are not expecting a budget that will encourage investment'' from overseas, said Jayram. If taxes on profits made from stocks ``are increased in the budget and negative statements made on'' asset sales, it will cause the rupee to decline.
The previous National Democratic Alliance government, ousted in last month's election, raised a record $3.5 billion in the fiscal year ended March 31 by selling state assets. The rupee gained 8.1 percent in the same period. Overseas investors bought a record $6.6 billion of Indian shares last year.
India's United Progressive Alliance government has said it has a policy of selling only unprofitable enterprises and plans a tax surcharge to increase spending on health and education.
Source: Bloomberg.com |
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