RBI may hike CRR: Credit Suisse

The Reserve Bank of India (RBI) may cut cash held by lenders for the fourth time this year as currency sales by the central bank aimed at curbing rupee gains flood the economy with excess money, Credit Suisse AG and Nomura Securities Co said.

The country's currency has strengthened beyond 40 a dollar for the first time in nine years amid unprecedented overseas investment in local shares.

The central bank has injected rupees worth $43.1 billion in the nine months to July, almost three times the amount in previous nine months.

"Continued rupee-selling intervention could pose an inflation risk owing to excess liquidity,'' said Tetsuji Sano, senior economist at Nomura in Tokyo. "We expect the RBI to continue to raise the cash reserve ratio to control money-supply growth.''

Trade Minister Kamal Nath yesterday said the gain in the currency may hit exports, which have doubled their share of the economy since 2003.

The rupee is strengthening as the central bank isn't absorbing fully record dollar inflows from overseas investors such as JPMorgan Chase & Co and Morgan Stanley.

"There is a risk of a cash reserve ratio rise if foreign inflows remain for a few weeks at levels seen in the last two days,'' Credit Suisse analysts Nilesh Jasani and Arya Sen said in a research note today. "Policymakers are clearly not too happy with the rupee falling below 40 for the first time in almost 10 years.''

Overseas investors bought a net Rs 2,485 crore ($608.6 million) of Indian shares on September 19, nine times the average of the past six months. The Securities & Exchange Board of India will release data for yesterday's purchases later today.

Foreign investors are buying shares and building factories in India to take advantage of the nation's record growth, that's second only to China among the world's biggest economies.

The government expects foreign direct investment to double to $30 billion in the current financial year ending March 31 as companies including Volkswagen AG, Europe's biggest carmaker, builds its first factory in the country.

The RBI increased the cash reserve ratio, or the proportion of deposits commercial banks need to place with it as reserves, for the third time this year in July to curb lending to consumers and check demand. The central bank will announce its next monetary policy on October 30.

Last month, the government imposed curbs on companies seeking to borrow from abroad to slow capital inflows. Companies borrowing more than $20 million overseas can't remit the proceeds to India, and the central bank's permission will be needed to repatriate funds up to $20 million, according to the new rules.

The rupee is Asia's best-performing currency this year, climbing 11 per cent since January 1. The benchmark Bombay Stock Exchange Sensitive Index, Sensex, has jumped 5 per cent to a record since the US Federal Reserve's September 18 rate cut.

The RBI said on September 14 it intervenes in currency markets, arranging purchases or sales of foreign exchange to contain volatility.

Pressure on the central bank to stem the rupee gains is mounting. Trade Minister Nath said yesterday in New Delhi the gain in the currency is a cause for concern and that the government may review its goal of a 20 per cent increase in merchandise exports this year.

Still, India's economy grew at an unprecedented average pace of 8.6 per cent between April 2003 and March 2007, when the rupee gained 3.3 per cent against the dollar.

That may be because 40 per cent of India's exports go to the European Union, which is more than the 20 per cent accounted by the US, according to government data.

"Europe is more important than the US for India as a trade partner,'' said Sebastien Barbe, senior economist and currency strategist at Calyon in Hong Kong.

Barbe reckons the central bank won't intervene in the foreign-exchange market and will allow the rupee to strengthen further if the inflation rate crosses the 5 per cent target.

Inflation is currently at 3.32 per cent, the lowest since 2002, and has stayed below the central bank's target since June.