Indian rupee to appreciate by 10% in a year

India’s rupee, which posted its best month on record in May, is set to rally 10 percent to 43 per dollar by mid-2010 as fund inflows from abroad pick up and lower oil prices improve the nation’s trade balance, Calyon said.

The rupee may outperform many Asian currencies as Prime Minister Manmohan Singh includes “some significant pro-market reforms” in his second term, helping attract investment, Sebastien Barbe, Calyon’s Hong Kong-based currency strategist, wrote in a research note today. The central bank may also favor a stronger rupee to combat inflation, which policy makers anticipate will accelerate later this year, he wrote.

“With risk appetite coming back gradually, and against the post-election backdrop, we believe the rupee should benefit from the oil-induced improvement in the trade balance,” wrote Barbe at the investment-banking unit of France’s Credit Agricole SA.

Calyon had earlier forecast the rupee will reach 43 by the end of 2010, and cited the “surprisingly good outcome from the elections” and a global rebound in risk appetite as the reasons for its revision. The median estimate in a survey of six analysts is for the rupee to trade at 47.50 by mid-2010.

The rupee surged 6.4 percent in May, the biggest monthly gain since at least 1973, on optimism Singh will revive stalled reforms as a resounding victory for his Congress party-led coalition eliminated the need to enlist the support of Communists to retain power.

Overseas Investment

The currency traded at 47.085 a dollar as of 12:14 p.m. in Mumbai, up 0.2 percent from yesterday and little changed on the week, according to data compiled . The price of crude oil in New York was recently $69.40 a barrel, less than half the record $147.27 set in July last year.

India may allow greater overseas investment, sell stakes in state-run companies and inject more capital into lenders to stoke economic growth, President Pratibha Devisingh Patil told lawmakers yesterday, as she unveiled Singh’s agenda to a joint session of parliament in New Delhi.

The Bombay Stock Exchange Sensitive Index jumped 28 percent last month, its best performance in 17 years, as overseas investors bought $4.3 billion more of the nation’s shares than they sold. That’s the most they’ve added to their holdings in a month since October 2007.

“Should the new administration deliver on reforms, there could be further portfolio inflows,” Barbe wrote.

The rupee may still “correct” back to 48 in the short term as the rebound in stocks may have overpriced the speed at which the likely policy changes will be implemented, according to Calyon.

Faster Growth

Stimulus spending, low borrowing costs and an easing global recession will help accelerate economic growth in the fiscal year that starts April 2010, Barbe wrote. Gross domestic product may increase 7 percent, after expanding 6 percent in the current year, he said.

The Reserve Bank of India may reduce its benchmark interest rate no more than a quarter-percentage point as it approaches the end of its rate-cutting cycle before the wholesale price index starts to rise, Barbe wrote. Inflation was below 1 percent in each of the 12 weeks through May 23, the latest data show.

Policy makers have slashed the overnight lending rate, or repurchase rate, six times since mid-October to 4.75 percent, the lowest level since it was introduced in 2000.

The difference between one- and five-year swap rates will narrow as the return of inflation and prospects of monetary tightening push up the short end of the curve, according to Barbe. Rates at the longer end may also increase, albeit at a slower pace as Singh “eventually shows a stronger commitment” to rein in the fiscal deficit, Barbe wrote.

The spread may narrow to between 1 and 1.2 percentage points toward the final months of this year, from 2.16 percentage points today, according to Calyon. The gap reached a record-high 2.3 points on May 28.