Slowing Indian Inflation Could Curb Rupee Flows

Nov.15.10 | About: WisdomTree Indian (ICN)

Indian wholesale inflation is down to a relatively sedate 8.58% annualized rate, which is giving Delhi room to keep local interest rates unchanged for the next few months.

The fact that inflation slowed from last month's annualized 8.62% increase paves the way for the Reserve Bank of India to pause in its recent campaign of interest rate increases -- at least until the end of the year, local analysts say.

This would leave Indian benchmark rates at 6.25%, which is still attractive enough to foreign investors to lure capital from the much lower bond yields of the developed world. However, avoiding another rate hike lets Delhi avoid artificially making the rupee more expensive relative to other global currencies; a stronger rupee would only compound the problem faced by countries like Brazil and, increasingly, within India.

In the current economic environment, an overly strong currency can swell a country's reserves to unhelpful levels while robbing local industry of its global competitiveness. To avoid this kind of situation, several nations have flirted with various schemes for depressing the value of their money: taxing foreign flows of capital into local assets, cutting interest rates or even intervening outright in the currency markets.

The simple absence of interest rate increases on the horizon should help curb the rupee's recent rise. However, as money floods into rupee-denominated assets, it may only slow the rally into funds like ICN:

Beware food inflation numbers coming out from India on Friday.

Disclosure: No position