Standard Chartered revises downwards forecast on Rupee

Mumbai, May 7 (UNI) International banking major Standard Chartered Bank said today it has revised its US Dollar-Indian Rupee (INR) forecast for Q2, Q3 and Q4 downwards to 41.80, 42.50 and 42.20 from 43.60, 44.00 and 43.80 respectively.

''The Reserve Bank of India (RBI) appears to be tolerating a much greater degree of INR strength than we had previously expected. This is indicated by its overvaluation on a real effective exchange rate (REER) basis. Our own proprietary SCB INR REER indicates a multiyear 'overvaluation' of around 17 per cent. This comes from assuming that the base year of FY 93-94 is where the RBI sees fair value for the INR,'' Standard Chartered Bank managing director and regional head Sundeep Bhandari explained.

The rupee has recently been on an appreciating path, breaching one psychological level after another, before reaching to almost 8 per cent. Normally, the central bank never used to tolerate such an appreciation, but this time around the currency has been allowed to trade more in sync with demand and supply conditions, in a bid to reign in inflation. Experts are of the view that the current INR strength has been largely due to the relative absence of the Central Bank from the Forex market.

Worries over inflation and a desire to use policy tools beyond just hiking interest rates seem to be behind this. The authorities attempt to rein in inflation is evident from the various monetary, fiscal and now exchange rate measures announced and practised in the past few days. In view of this, Standard Chartered has revised its forecasts for USD-INR down, while keeping to the view that the INR will correct in H2 as inflation comes off and the market refocuses on India's external deficit, he said. Standard Chartered has revised the Q2 to Q4 forecasts for USD-INR to 41.80, 42.50 and 42.20 from 43.60, 44.00 and 43.80 respectively, Mr Bhandari said and added that ''however, in the short-term until a new line in the sand is drawn, the INR could continue to rise along with volatility.'' UNI