Rupee may drop 3% by June-end

The rupee may weaken 3 per cent against the dollar by the end of June as the central bank steps up sales of the currency to curb gains, according to Standard Chartered.

The Reserve Bank of India is preventing investment inflows from strengthening the rupee by purchasing dollars, Standard Chartered economist Shuchita Mehta said in a research note.

To absorb the local currency it has injected into the economy, a process known as sterilisation, the central bank increased the amount of cash banks need to set aside as reserves on February 13.

"They'll be willing to buy flows and sterilise these as well,'' Mehta wrote in the note dated February 13. Traders "looking for a sharp appreciation in the rupee might meet with some disappointment''. She wasn't immediately available for comment.

Interest in the country has increased among overseas investors after Standard & Poor's last month raised the nation's debt rating to investment grade for the first time in 14 years.

Inflows of investment have pushed up the rupee, which may be overvalued by as much as 10 per cent relative to a basket of currencies of India's main trading partners, Mehta said.

The rupee, which closed at 44.105 against the dollar in Mumbai today, may fall to 45.50 by the end of June, and to 45.75 by the end of September, according to estimates by the London-based bank, which makes about two-thirds of its profit in Asia.

The currency rose about 5.2 per cent in the past six months. JPMorgan Chase & Co estimates the central bank may have bought $3.5 billion of foreign-exchange in the past two weeks. That would be more than the $1.8 billion it purchased in all of December, according to the latest figures from the Reserve Bank.

"We believe the central bank is clearly trying to balance out two factors "" one on the monetary side and the other on the exchange-rate side,'' Mehta said.

The currency may strengthen to 43 by the end of December, the highest in eight years, as direct investment by overseas companies increases and Indian firms raise funds abroad to expand locally, said Gene Frieda, head of emerging market strategy at Royal Bank of Scotland in London.