End of the Rupee run?? Not against the US Dollar

The Indian rupee's rally against the U.S. dollar is likely to run out of steam, as the central bank may further restrict capital inflows that have powered its gains so far, Kotak Mahindra Bank said in a recent note.

It forecast the rupee would ease to 42-43 versus the dollar by the end of 2007.

The Reserve Bank of India (RBI) has signalled the need for tightening capital controls, the report said, pointing to recent measures to limit the amount of money raised by local companies abroad.

Earlier this month, C. Rangarajan, head of the prime minister's economic advisory panel and a former RBI governor, said that certain kinds of capital flows could be discouraged without giving a signal that foreign capital was unwanted.

The rupee has gained about 8.5 percent this year, making it Asia's best-performing currency against the dollar.

The central bank has intervened this year in a bid to cap the rupee, which hit a nine-year peak of 40.28 per dollar in late May, but its rupee selling efforts has led to an increase in money supply requiring separate measures to suck them back in.

Kotak said in its report the local currency would come under pressure, with a growing section of the market pricing in a rate hike by the U.S. Federal Reserve.

Such a rate increase could encourage a shift in investment portfolios towards dollar assets.

"Such probable outflows of global liquidity from the emerging markets including India are likely to lead to some moderating bias in the Indian stock markets. Hence a depreciation of the rupee is a natural corollary," it said.

Firm oil prices and a slowdown in export growth, caused by the rupee's strength, will result in a widening of the trade deficit. This could further weigh on the rupee, the report said.

Oil , India's largest import item, was trading near a nine-month high on Tuesday