BEIJING/MUMBAI China will permit only faint yuan appreciation this year as its central planners wait for exports to recover at the risk of inflaming disputes over their controversial exchange rate policy, according to a Reuters poll on BRIC nations' currencies.
China's iron grip on its currency contrasts with the somewhat more flexible stance in India, where the government is expected to let the rupee increase about 4 percent to around 44 per dollar on the back of rising foreign portfolio inflows.
The poll of more than 100 foreign exchange strategists in the BRIC countries themselves -- Brazil, Russia, India and China -- as well as the United States and Europe also forecast a rangebound Brazilian real and a slightly higher Russian rouble.
The outlook was marginally more bullish for the rouble and the rupee than the previous Reuters BRIC FX poll three months ago, while forecasts for the yuan and the real were little changed.
China is expected to keep its de facto dollar peg in place for the next three months, keeping the yuan stable at 6.83 to the dollar as it has done since its exports collapsed with the worsening of the global financial crisis in mid-2008.
Beijing is seen backing off the peg in incremental fashion as 2010 unfolds, nudging the yuan up 1 percent in the second quarter to 6.75 per dollar and a further 2 percent by the end of the year to 6.62 per dollar.
"With a gradual export recovery as well as a more solid economic recovery, the yuan will again rise. This will allow China to relieve its domestic inflationary pressure," said Zhou Xi, an analyst at Bohai Securities in the northern city of Tianjin.
Beijing's currency policy, long criticised by developed countries, has also come under fire from other BRIC states in recent months as China has outpaced all major economies in its recovery from the crisis.
But the government has shown no willingness to change tack. Premier Wen Jiabao lashed out at critics last month, saying foreign countries calling for the yuan to rise were, in fact, trying to stifle China's development.
Analysts said the yuan is undervalued by 20 percent, according to a Reuters poll late last year.
The Indian rupee is seen picking up where it left off in 2009, rising another 4 percent on top of its 4.7 percent increase last year, its appreciation driven mainly by inbound portfolio investment.
India's benchmark BSE share index gained 81 percent in 2009, its biggest rise since 1991, and analysts expect further gains in local shares to again entice foreign investors.
"The risk is that equity valuations at this level are looking stretched and we need a strong trigger for a leg-up for the rupee," said Abheek Barua, chief economist with HDFC Bank.
He expects a possible rise of the dollar this year to check the rupee's gains in the coming months, but forecasts the rupee to appreciate by the end of 2010.
"There could be an across-the-board gain for the dollar, and one reason for this is the unwinding of carry trades as the Fed starts reducing liquidity infusion," Barua said.
"By the end of the year, the rupee would start to appreciate again as the problems with the U.S. economy get priced into the dollar. Once we see that happening, more capital inflows would appreciate the Asian currencies including the rupee," he added.
Analysts also expect higher interest rates to encourage more inflows into higher-yielding local assets.
In a Reuters poll last month, all 31 economists surveyed expected the Reserve Bank of India to increase at least one of its two policy rates by the end of April and most expect the central bank to tighten liquidity before raising rates.
"This, against a general backdrop of very low interest rates in economies like the U.S., U.K. and Japan, is bound to attract more debt-related capital flows to India," said Anubhuti Sahay, an economist with Standard Chartered.
The Brazilian real is expected to stay rangebound in 2010, from 1.73 per dollar at the end of January to 1.75 at the end of the year, according to median survey forecasts.
The real strengthened about 34 percent against the dollar in 2009 as the country attracted massive inflows from investors borrowing money at cheap rates abroad to search for higher yields in Brazil.
But a brightening U.S. economic picture could chip away at the real, said Zeina Latif, chief Brazil economist with ING Bank in Sao Paulo.
October elections, in which Brazilians will pick a new president, and slippage in external accounts could also weigh, she added.
Nonetheless, "we've seen less volatility in currency markets," Latif said. "This justifies more well-behaved trading ranges."
(Additional reporting by the Bangalore Polling Unit, Luciana Lopez in Sao Paulo and Toni Vorobyova in Moscow)
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