Re to rise 6% to 37/dollar by 2008

The rupee will rise more than 6 per cent by the end of 2008 as the pace of economic growth keeps luring overseas funds, according to Royal Bank of Scotland, a unit of the UK's second-biggest lender.

The currency might reach 37 to a dollar, the strongest since November 1997, even as the central bank curbs capital inflows to temper rupee gains, Sanjay Mathur, Singapore-based strategist at the bank, wrote in a research report.

Purchases of Indian stocks by global investors are at a record this year while foreign direct investment this year through July is already 9 per cent higher than for the whole of 2006.

"Although the central bank will continue to lean against the wind it is unlikely to be able to stop the rupee's appreciation,'' Mathur said in an interview. "The diversity of the flows suggests that to be effective, a variety of controls will be needed.''

The rupee will end the year at 39, the bank predicts. The currency touched 39.185 on November 7, the strongest since February 1998.

The rupee is the second-best performer this year after the Philippine peso among the 17 currencies of Asia's biggest economies, rising 12.4 per cent.

The Bombay Stock Exchange's Sensex rose past 20,000 for the first time on October 29 as funds abroad more than doubled their purchases of local equities this year compared with 2006.

"There has been a distinct step up in private capital flows,'' Mathur said. "Data show foreign direct investment and external borrowings are closing in on the gap with portfolio flows. The reliance on portfolio flows is declining.''

The government and the central bank imposed restrictions on foreign money to prevent gains in the rupee from hurting exporters. The Reserve Bank of India, the nation's central bank, bought a record $11.9 billion of foreign currency in September, its 11th straight month of purchases.

The stock market regulator on November 16 said overseas investors buying equities anonymously, using so-called participatory notes, had 18 months to switch to investing directly.

"We believe there are few options for the central bank but to continue with the present mix of intervention and rupee appreciation,'' Mathur said. "We forecast that the rupee will continue to rise through 2008.''