Re may fall this week

The cash reserve ratio for banks will be raised to 6.5 per cent from 6 per cent in two stages starting April 14, the Reserve Bank of India said after the markets closed on March 30, a measure that will drain 155 billion rupees ($3.6 billion) from the banking system. The RBI also raised the repurchase rate, the rate at which it lends overnight to banks, to 7.75 per cent from 7.5 per cent. "The increase in cash reserve will give a cushion to the central bank to buy dollars,'' said Mohan Shenoi, treasurer at Kotak Mahindra Bank in Mumbai.

``That should pressurise the rupee downward this week. Banks will look to sell dollars more aggressively, which the central bank may absorb.''

The rupee rose 2.7 per cent in the fiscal year through March 30 to 43.49 against the dollar, according to data compiled by Bloomberg. It may decline to 43.75 this week, Shenoi said.

Governor Yaga Venugopal Reddy has raised borrowing costs six times in 14 months to curb inflation, which has stayed a per cent point above the bank's highest estimate. The rupee rallied to an eight-year high on March 28 on a cash shortage in the banking system and then had its biggest drop in 11 years the day after.

``There are concerns about inflationary pressures being reinforced by ample liquidity driven by excess capital flows,'' Reddy said in Cernobbio, Italy while the central bank issued a statement in Mumbai announcing the measures. ``The currency appreciation or depreciation could, at times, be steep and sudden, resulting in a disruption in the real sector and therefore there is a need for containing excess volatility in foreign exchange markets.''

The inflows of investment from abroad, attracted by the country's economic growth, are also helping the rupee gain. Direct investment from abroad may double to $12 billion in the year ended March 31, exceeding equity purchases by overseas investors for the first time, Trade Minister Kamal Nath said in February.

Asia's fourth-largest economy will grow 9.2 per cent in the year through March, according to government estimates, accelerating at the second-fastest pace among the major world economies.