Currency Strategists: India's Rupee Will Rise in 2007, UBS Says

By Anoop Agrawal
http://www.bloomberg.com/apps/news?pid=20601087&sid=aKzovNI_1meI&refer=home

Nov. 27 (Bloomberg) -- India's rupee will strengthen next year on a combination of falling crude oil prices, investment in stocks by global funds and higher overseas borrowings by local companies, said Sanjay Mathur, an economist at UBS AG.

``This Indian rupee appreciation story is here to stay,'' Singapore-based Mathur said in a report on Nov. 22. UBS predicts the rupee will rise 3.8 percent to 43 per dollar by the end of 2007, revising its forecast from 44 previously, Mathur said.

India's ruling party has sought agreement from its Communist coalition partners to ease restrictions on foreign investment in banking, insurance, mining and transport, Finance Minister Palaniappan Chidambaram said Nov. 20. The government is seeking overseas investors to sustain economic growth of more than 8 percent in the next 10 years.

The rupee rose 0.5 percent last week to 44.6988, according to data compiled by Bloomberg, a gain of 0.8 percent this year. Crude oil for January delivery on the New York Mercantile Exchange rose 1.1 percent to $59.90 a barrel when electronic trading ended at 1:15 p.m., Nov. 24. It has dropped 23 percent from an all-time high of $78.40 on July 14.

India's currency may benefit as refiners will need less to pay for oil imports after crude fell more than a fifth from their peak. India gets three quarters of its energy needs abroad. The rupee also may gain as overseas funds are set to buy $1 billion of shares for a fourth month in November as the Sensitive Index rose to a record, according the stock market regulator.

``The fall in oil prices has been significant,'' Mathur said in his report. ``Portfolio capital flows have tended to be the single most important influence on the rupee.''

Less Tolerant

The rupee was the second-best performer among the 15 Asia- Pacific currencies tracked by Bloomberg in the past three months with a 4.2 percent gain as global investors bought a net $5.94 billion of shares since July.

Speculation the central bank will stem gains in the rupee is the biggest threat to his forecast, Mathur said.

``The main risk is the Reserve Bank of India becoming less tolerant toward rupee strength,'' Mathur said. ``This has not been the case over the past three months.''

The central bank didn't buy or sell currencies in the three months ended August, according to its monthly figures. The Reserve Bank has twice this month said it doesn't ``want excessive volatility in the exchange rate.''

A weaker rupee may help Trade Minister Kamal Nath achieve his objective of boosting exports to $126 billion in the year ending March 31, and to $165 billion by March 2010. A lower rupee reduces the cost of exports, which account for about 12 percent of India's $775 billion economy.

The economy grew 8.4 percent in the fiscal year ended March 31, compared with 7.5 percent the previous year, the second fastest behind China among the world's major economies.

Overseas Debt

The rupee also will gain as more Indian companies plan to raise capital offshore to expand business at home, boosting the inflow of dollars, Mathur said.

``Demand and supply side factors are supportive of higher overseas borrowing,'' Mathur said. ``India is in the midst of a capital expansion cycle and scope for external borrowings is significant.''

Raising debt abroad was given a boost by the central bank on Oct. 31, when it said companies can borrow as much as $250 million in a financial year without approval for loans of 10 years or more. That figure is over and above the current limit of $500 million for which central bank approval is not needed.

Borrowing by Indian companies in the year to March 31 will be more than the $17.3 billion the previous year, Mathur said.

ICICI Bank Ltd., the nation's largest lender by market value, said on Nov. 21 it will borrow $1 billion in yen to increase loans in India. Infosys Technologies Ltd., the country's second- biggest computer services provider, will sell $1.6 billion of shares in the U.S. in the biggest international equity offering by an Indian company.

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