News: Rupee rises to 9-yr peak on robust inflows

(RTR 23/04/2007) Mumbai - The Indian rupee tested a fresh nine-year high on Monday, as capital inflows surged into Asia's fourth-largest economy, prompting investors to bet the rupee would rise further and build short positions in the dollar.

Traders said strong demand for the U.S. currency from oil refiners to cover their import bills, kept a check on the rupee's gains.

The partially convertible rupee ended at Rs 41.67/68 per dollar, off an early peak of Rs 41.575, its highest since May 1998. It had closed at Rs 41.760/770 on Friday.

"The market is a divided about whether the central bank will impose controls on ECB (external commercial borrowings) in the policy meeting tomorrow," said a dealer at a private bank.

"What they do will dictate the rupee's direction in the short-run," the dealer added.

The central bank caps external commercial borrowings, known as ECBs, at $22 billion per financial year, and companies and banks can bring in $500 million without asking permission.

A large section of the market suspects the Reserve Bank of India will tighten norms for ECBs at a monetary policy review on Tuesday, in a bid stem the rupee's gains.

At its high, the rupee was up 6.4 per cent this year -- the best performing Asian currency against the dollar. The next best performer is the Thai baht, with a rise of about 3.6 per cent.

The rupee had risen 4.5 per cent this month at the day's high, and 13.1 per cent above a three-year low of Rs 47.04 hit last July.

In a bid to thwart the rupee's rise, the central bank bought $19.7 billion in the four months to end of February, and the market suspects it intervened in March as well.

The central bank's persistent intervention has fuelled inflation and money supply, which are both running above its target levels.

Data on Friday showed annual inflation for the week ending April 7 at 6.09 per cent, higher than forecast.

JP Morgan says that trading volumes would remain elevated as the rupee swung between buying by exporters and selling by carry traders and equity inflows, coupled with uncertainty over the central bank's stance on the currency.