The Reserve Bank of India has allowed the rupee to rise 7.5% this quarter to fight inflation. Traders on Monday said the central bank was buying dollars to slow the currency's gains as it makes exported goods more expensive overseas.
India's economic growth was the fastest in almost two decades in the fiscal year ended March 31, drawing in a flood of foreign funds."With heavy capital flows, there's pressure on the rupee to strengthen", said Rohan Lasrado, a trader at HDFC Bank Ltd in Mumbai.
The rupee closed at 40.4975 a dollar versus 40.5175 on Monday in Mumbai. The currency pared gains on Monday after rising to as high as 40.285, the strongest since May 1998, on speculation the central bank sold it. India's rupee may rise to 40.20 in coming days, Lasrado said.
Traders said the Reserve Bank of India bought about $600-$650 million after the rupee surged on Monday to 40.28 per dollar, its highest since May 1998, on heavy dollar selling by a software services firm. The rupee is Asia's best performing currency against the dollar this year, gaining more than 9 % on robust capital inflows into the fast-growing economy.
Gains in the currency are a concern and India's trade ministry is in talks with the central bank regarding the rupee, Commerce Minister Kamal Nath told reporters in Mumbai on Tuesday.The Reserve Bank of India is focusing on fighting inflation that accelerated to the fastest pace in two years in January. Dollar purchases to weaken the rupee add funds to the banking system, stoking inflation.Governor Yaga Venugopal Reddy in a speech in Tokyo said the central bank's expectations are for inflation between 4% and 4.5% to maintain growth.
The central bank scaled back dollar purchases after buying a record $11.9 billion in February. Inflation slowed to 5.27% in the week ended May 12, an eight-month low, a government report showed last week. The rupee has surged 9.4 percent this year, the best performer among 16 most-active currencies in Asia. India's $854 billion economy expanded 9.2% in the fiscal year to March 31, the fastest pace in almost two decades, commerce minister Nath said.