Rupee declines....but strength expected to continue on weak US Dollar

Trading of currencies on the world wide Forex markets continue to be the best way to hedge cost of living increases in both India and China.

India's Rupee Declines on Speculation Importers Sold Currency

By Anoop Agrawal

July 24 (Bloomberg) -- India's rupee fell, reversing earlier gains, on speculation importers took advantage of the currency's biggest advance in more than a decade to buy dollars needed for crude oil imports.

The currency dropped from the highest in more than two months as refiners increased dollar purchases to benefit from a drop in crude oil prices. The commodity dropped more than 15 percent from an all-time high of $147.27 a barrel reached on July 11. A stronger rupee will reduce costs for Indian refiners, who meet three-quarters of their annual oil needs from imports.

``Oil is still not in what we may call a comfort zone, so refiners are taking advantage of the little opportunity they get,'' said Vikas Babu, a currency trader at state-owned Andhra Bank in Mumbai. ``The rupee may still be under pressure.''

The rupee weakened 0.1 percent to 42.1250 per dollar at the 5 p.m. close in Mumbai, after earlier climbing as much as 0.6 percent, according to data compiled by Bloomberg. Yesterday's 1.5 percent advance was the biggest since January 1998.

A 30 percent rally in oil prices this year boosted India's average crude imports to $7.8 billion a month from $5.5 billion in 2007, Bloomberg data show.

The rupee rose earlier on speculation exporters purchased the currency and sold dollars to guard against an erosion of earnings should the rupee rise further. The recent slump in oil prices also spurred optimism inflation will ease.

``The rupee will accelerate gains, helped by exporters' dollar sales and the fall in oil,'' said V. Kumar, chief currency trader at State Bank of Travancore in Mumbai. ``Fundamentals are driving the rally.''

Risk-Reward

The central bank will support the rupee and increase interest rates twice more this year to combat inflation, according to Standard Chartered Plc.

``We believe the risk-reward balance has changed for the rupee as tight monetary policy could mitigate rupee weakness for now,'' the U.K. bank's Singapore-based strategist Thomas Harr said, confirming the contents of a research report he helped write yesterday. ``Most negatives for the rupee are currently in the price.''

Asset managers should turn ``neutral'' on the rupee from ``underweight'' as authorities ``have finally woken up'' to the inflation threat and are starting to raise rates to ``more appropriate levels,'' Harr wrote.

Raising Rates

The Reserve Bank of India may increase its benchmark repurchase rate, or its overnight lending rate, twice by 50 basis points each time to 9.5 percent in 2008, Standard Chartered's analysts said in the report. A basis point is 0.01 percentage point.

The central bank may also raise the reverse-repurchase rate, or the rate at which it drains money from the banking system overnight, twice by a similar amount to 7 percent.

India's inflation rate has tripled this year as crude oil advanced 69 percent in the past 12 months. Wholesale prices climbed 12.03 percent in the week ended July 12, the fastest since February 1995, economists said before a government report today.

Reserve Bank Governor Yaga Venugopal Reddy increased the policy rate twice in June after keeping it unchanged for almost 15 months. He last raised it on June 24 by the most since 2000 to 8.5 percent.

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