India Unable to Use Rupee Gains to Curb Inflation, Fitch Says

India's widening current-account deficit and slowing capital inflows from overseas have denied policy makers the option of letting the rupee gain to curb inflation, according to Fitch Ratings.
The local currency this year has pared more than half of its advance in 2007, when it rallied 12.3 percent, the most in more than three decades. Sales of local stocks by overseas funds and rising oil prices sparked the slump. India's annual inflation rate more than doubled to 8.24 percent in the week ended May 24 from a five-year low of 3.07 percent mid-October.
``Our sense is that when the inflation numbers had started to go up, the central bank had the option to allow the currency rise at their discretion,'' James McCormack, Fitch's head of Asia-Pacific sovereign ratings, said in Mumbai on June 6. ``That has now been taken away because the current-account position isn't strong and capital inflows aren't rising either.''
India's trade deficit widened to a record $9.9 billion in April while the shortfall in the current account, a broad measure of trade and investment flows, widened to $5.4 billion in the quarter through December from $4.7 billion in the previous quarter, according to the central bank.
Overseas money managers sold $4.8 billion more local shares than they bought this year, more than a fourth of their record net purchases in 2007, according to data provided by the Securities and Exchange Board of India.

The rupee closed last week at 42.66 per U.S. dollar.
Inflation may jump to a 13-year high of 9.5 percent after the government raised the retail prices of diesel, gasoline and cooking gas last week, according to analysts at Lehman Brothers Holdings Inc., Standard Chartered Plc and ICICI Securities Ltd. Crude oil prices have more than doubled in the past 12 months to a record $139.12 a barrel on the New York Mercantile Exchange.
``Exchange rate appreciation pressures persisted last year because of the flows,'' McCormack said. ``They don't have the option now. Over time there will now be pressure on the exchange rate to weaken. The rupee is going to remain on the same course for the rest of the year.''