A slowdown in the pace of inflation to an eight-month low may give the Reserve Bank of India room to buy more dollars, after scaling back such purchases in March and April. The rupee gained 9.5% this year to a nine-year high, helping reduce the cost of imports and pressure for price increases.
After the latest inflation data, the central bank is in a much better position to intervene and halt the rupees gain, said Vikas Babu, a currency trader at state-owned Andhra Bank in Mumbai. Refiners may also increase dollar purchases as they settle month-end import bills, he added.
The currency climbed 0.2% to 40.5175 per dollar late evening in Mumbai. The rupee gave up a gain of as much as 0.8% to 40.2850, the highest since May 21, 1998, prompting speculation that the central bank sold the currency to stop its advance. The rupee may retreat to 40.75 against the dollar this week, the median estimate of 10 traders surveyed by Bloomberg News showed. Deutsche Bank AG and Goldman Sachs Group Inc last week both forecast the rupee will weaken to about 43 per dollar in 12 months. The central bank, after buying a record $11.9 billion of dollars in February, has slowed its purchases on concern intervention will add rupees to the financial system, fueling inflation. The RBI bought $2.3 billion in March, data on its web site show. It added about $4.9 billion to foreign-exchange reserves in April, part of which was through acquiring US currency.
Wholesale price inflation in the week ended May 12 slowed to 5.27%, the lowest since September, a government report showed last week. The rate reached a two-year high of 6.69% at the end of January. Slowing inflation also eases pressure on the central bank to raise interest rates.
The benchmark overnight lending rate is at a five-year high of 7.75%, after five increases in the past year.