India Joins The Easing Party in Bid to Weaken Rupee

By Anjani Trivedi 

        The Reserve Bank of India joined other central banks Wednesday in voicing concerns about a strong currency as it cut interest rates for the second time this year.
        Central banks have been easing monetary policy in recent months, sending their currencies weaker against the U.S. dollar. The U.S. Federal Reserve, on the other hand, is poised to raise interest rates as the American economy recovers, helping to push the dollar to its strongest in over a decade.
        Despite the Indian central bank's rate cut and comments on the rupee's strength, the rupee strengthened as much as 0.35% in a knee-jerk reaction against the dollar, before paring the gains within minutes.
        Central banks are taking increasingly aggressive action as they move to devalue their currencies, stimulate growth and stave off deflation. Denmark bought a record amount of foreign currency last month, as the kroner, which is pegged to the euro's exchange rate, comes under severe appreciation pressure. This past weekend, China's central bank surprised markets by cutting interest rates earlier than expected, setting the daily reference rate weaker and sending its currency to its weakest in over two years against the U.S. dollar.
        In its monetary-policy statement, the Reserve Bank of India noted that "the rupee has remained strong relative to peer countries." The bank added that, "while an excessively strong rupee is undesirable, it too creates disinflationary impulses."
        "Given two surprise rate cuts, [the RBI] will continue to keep the rupee well supported," said Khoon Goh, a currency strategist at ANZ Bank in Singapore. "The Indian rupee will continue to outperform other Asian or emerging market currencies. Despite two rate cuts, the rupee is also high-yielding."
        Market participants said the central bank was buying U.S. dollars and selling rupees in the currency markets after the rate move, in a bid to keep the rupee from strengthening too sharply.
        Analysts from Barclays said the RBI statement suggested the central bank would continue to try to limit the rupee's appreciation against the dollar. The bank recommends investors bet on the rupee against currencies such as the euro and low-yielding emerging-market currencies, and doesn't expect the rupee to hold its gains thus far against a strong dollar.
        Over the past year, the Indian central bank has built up its foreign-exchange reserves to help buffer the currency and prevent any sudden volatile moves. On Wednesday, the central bank acknowledged that while it doesn't target a level for the rupee, "it does intervene on occasion, in both directions, to reduce avoidable volatility in the exchange rate."
        With foreign-investment limits in Indian bonds filled to the brim, investors say there are very few channels for money to flow into--helping to explain the muted movements in the currency markets after Wednesday's rate cut. Typically, portfolio inflows bolster a currency.
        India's stock market rose to record high after the rate cut.
        The Indian rupee last traded at 61.88, down 0.11% against the U.S. dollar. The rupee has strengthened 1.9% against the dollar this year, making it one of the best-performing emerging-market currencies.
        Write to Anjani Trivedi at anjani.trivedi@wsj.com
        (END) Dow Jones Newswires

        March 04, 2015 02:24 ET (07:24 GMT)

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