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New Delhi: The Reserve Bank of India may allow the rupee to appreciate to temper prices, joining central banks across Asia, as the global rally in commodities stokes inflation, economists said.
Fighting inflation with the exchange rate may bolster measures announced by Prime Minister Manmohan Singh's government after an emergency cabinet meeting on Monday.
India scrapped import duty on crude edible oil and banned the export of rice and pulses to augment local stocks. Prices rising at the fastest pace in 13 months may harm the ruling coalition's chances of retaining power in elections scheduled before May 2009.
A stronger currency may lower the cost of imports into India, the world's biggest buyer of vegetable oils after China. Asia's third-biggest economy also depends on crude oil from overseas to meet three-fourths of its energy needs.
"At this stage, the Reserve Bank of India and the government may be more willing to let the rupee appreciate as a means of controlling inflation," said Robert Prior-Wandesforde, an economist at HSBC Group in Singapore. "It's more effective in our view, than raising interest rates."
Central banks in Indonesia, Thailand and the Philippines may also let their currencies strengthen to combat inflation as food and energy prices soar, UBS and JPMorgan Chase said on Tuesday.
The three countries will seek currency gains rather than raise interest rates as higher borrowing costs will crimp economic growth, the banks said.
Singh's government also curbed exports of wheat and banned futures trading in some commodities. Last week, the government scrapped a tax benefit on exports of steel and cement to bolster domestic supplies.
Inflation is unacceptably high because of a spurt in the global prices of food, fuel and metals, Reserve Bank of India Governor Yaga Venugopal Reddy said in Mumbai on Monday. The central bank is ready to take steps to contain inflation after assessing the situation, Reddy said.
Palm oil prices rose 49 per cent in the past year, reaching a record last month, and wheat in Chicago has almost doubled in the past year to an all-time high of $13.495 a bushel on February 27. Crude oil gained 5.8 per cent in the first quarter, and is up 54 per cent from a year ago.
"To an extent, rupee appreciation is likely to be used to reduce the imported content of inflation, but a sharp appreciation is unlikely given exporters' concern," said Sonal Varma, a Mumbai-based economist at Lehman Brothers.
A stronger rupee makes exports more expensive to customers abroad while it also erodes earnings of companies when they repatriate their overseas income.
The central bank has kept its benchmark interest rate near a six-year high over the past year to contain price gains. Reddy has raised the central bank's policy rate nine times since October 2004 and ordered lenders to set aside more money as reserves five times since December 2006 to contain inflation.
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