News: Rupee at near 9-yr high, past 42/$

(RTR 16/04/2007) Mumbai - The Indian rupee jumped to a near nine-year high on Monday, strengthening past 42 per dollar on big capital inflows and absence of central bank intervention.

The rupee's rise was also aided by higher overnight cash rates, which forced banks to sell dollars for rupees to meet funding requirements.

The partially convertible rupee ended at 41.85/86, up 1.6 per cent from the previous close of 42.51/52.

It has gained more than 12 per cent from a three-year low of 47.04 in July, including a 5.6 per cent gain in 2007 making it Asia's best performing currency.

V. Rajagopal, head of FX trading at Kotak Mahindra Bank, said strong inflows were putting upward pressure on the rupee.

"The rupee may take a breather around 41.70 as the market positions for the next move," he said.

Domestic deposits by overseas Indians increased by $4 billion in 2006/07 while foreign borrowings by companies rose $14 billion, JPMorgan said in a note on Friday.

Foreigners have bought more than $1.5 billion worth of shares so far in 2007, compared with nearly $8 billion in 2006.

India's foreign exchange reserves rose above $200 billion for the first time in early April, which analysts said reflected capital flows and central bank intervention.

Analysts believe the rupee's rally has been partly fuelled by the central bank's near-absence in recent weeks from the currency market, to help fight inflation pressures caused partly by high money supply.

Cash in circulation is running at nearly 21 per cent fueling inflation, which has stayed above above central bank projections of 5.0-5.5 per cent.

The Reserve Bank of India (RBI) bought a record $11.9 billion in February to prevent the rupee's overvaluation on a trade-weighted basis.

"RBI is increasingly facing the complex task of trying to pursue an independent monetary policy, a relative open capital account and a managed exchange rate," JM Morgan Stanley analysts Chetan Ahya and Mihir Sheth said in a recent report.

"Its ability to prevent appreciation of the rupee is limited."