Falling Rupee May Add to India's Inflation, Rates, ICICI Says

A weakening Indian rupee, Asia's second-worst performing currency this year, may quicken inflation and prompt the central bank to raise its benchmark interest rate, according to ICICI Securities Ltd.
The Reserve Bank of India may increase its repurchase rate by a quarter-percentage point for the first time in more than a year, said Prasanna Ananthasubramaniam, an analyst at the Mumbai-based unit of India's second-biggest bank by market value. The rupee has declined almost 3 percent this year as equity purchases by overseas funds slowed amid a global credit crisis and rising oil prices pushed import costs higher.
``The offset of a strong rupee isn't available to contain the pass-through of global prices. In such a scenario, we don't rule out a hike in the repo rate,'' Prasanna said in an interview yesterday. Further rupee weakness ``cannot be ruled out, adding to inflation risks.''
Central bank Governor Yaga Venugopal Reddy kept the benchmark rate unchanged at a six-year high on April 29. He instead told lenders for the second time in less than two weeks to set aside more cash as a proportion of their deposits to slow growth in money supply.
The rupee fell 0.8 percent the same day, the biggest decline in almost two months, after the bank said the current- account deficit will be ``marginally'' higher in the fiscal year through March and said prospects for growth stand ``trimmed.''
The local currency weakened 0.1 percent to 40.51 a dollar on April 30, according to data compiled by Bloomberg. Financial markets were closed yesterday for a holiday in Mumbai.
Oil, Deficits
An advance in crude oil prices to an all-time high of $119.93 a barrel this week spurred demand for dollars as refiners settled import bills, placing the rupee on course for its biggest weekly loss since the five-day period ended March 7.
India's trade deficit widened 45 percent in the year ended March 31 to $80.4 billion, the government said yesterday. The shortfall in the current account, a broad measure of trade and investment flows, widened 46 percent to $5.4 billion in the quarter through December from $3.7 billion a year earlier.
The rupee's 12.3 percent rally last year, the most in more than three decades helped cool inflation to a five-year low in October before flaring up to a 3 1/2-year high.
Slowing Growth
Asia's third-largest economy should be prepared to face ``potentially large'' outflows of capital as the global credit crisis, now in its 10th month, makes global investors more risk averse, the Reserve Bank said April 29.
Global funds, who bought a record $17.2 billion in Indian shares than they sold last year, have dumped a net $2.6 billion this year as the central bank expects economic expansion to slow to as low as 8 percent this fiscal year. Growth averaged a record 8.7 percent in the past five years.
``With inflows slowing down, higher outflows on the trade account are likely exerting pressure on the currency'' to weaken, Prasanna said. ``We attach a reasonable probability'' to an increase in the benchmark rate.
The currency may trade between 40 and 40.50 to the dollar in coming weeks, he said. The median forecast in a survey of 22 analysts compiled by Bloomberg is for the rupee to advance to 39.45 by year-end