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UPDATE 2-Russia rouble gains for 8th week as funds flow in

Published 10/23/2009, 10:28 AM
Updated 10/23/2009, 07:09 AM

* C.bank buys $4.5 bln this week to stem rouble's rise

* C.bank may cut refinancing rate to 9 percent in 2010

* Funds flows to Russia surge

By Oksana Kobzeva and Toni Vorobyova

MOSCOW, Oct 23 (Reuters) - The Russian rouble scored its eight week of gains, propelled on Friday through another benchmark level against the dollar by investors shipping in cash to buy the high-yielding currency and its assets.

The Russian central bank has bought around $4.5 billion this week to keep the rouble's rise gradual, local dealers said.

First Deputy Chairman Alexei Ulyukayev said the regulator has purchased a total of $11 billion on the foreign exchange market so far in October and that falling inflation meant more cuts in official interest rates could come at any time.

The rouble closed at 28.95 against the globally battered dollar, firming beyond the 29.00 level for the first time since Dec. 26, helped by prices for Russia's oil exports reaching their highest levels in a year.

The rouble closed at 35.51 against the basket the central bank uses to guide its exchange rate policy, 7 percent stronger than at the beginning of September when its rally started. Ulyukayev confirmed that the central bank's new bid level against the basket was now 35.50.

A stronger rouble will help hold down inflation. Ulyukayev reiterated that a 1 percent appreciation in the rouble is generally thought to reduce inflation by 0.3 percentage points.

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A sharply reduced monetary supply and decreased consumer demand -- in the aftermath of the crisis that shrank Russia's economy by a tenth in the first half of 2009 -- have substantially eased inflationary pressures.

That has allowed the central bank to cut its benchmark refinancing rate by 300 basis points since April, to 10.0 percent. Ulyukayev said the next easing could come at any time.

He added that inflation this year should not top 10 percent, below the previous official forecast of 11-12 percent, and could well come down to under 9 percent in 2010.

"The refinancing rate can be lower than current inflation," Ulyukayev told a banking conference.

"If in 2010 inflation will be lower than 9 percent, then the refinancing rate could be reduced at least to that level."

LURING INVESTORS, BUT FOR HOW LONG?

Despite falling interest rates, renewed investor interest in riskier assets has brought a wave of fresh capital to Russia.

The Emerging Portfolio Fund Research weekly fund flow data show that, for the week ending Oct. 21, Russia-dedicated funds saw an inflow of some $451 million, the eighth consecutive week of positive flows and the second best performance in records going back to 2005, according to Alfa Bank.

Investors' mid-term sentiment toward the rouble has also been rapidly improving. Non-deliverable forward (NDF) contracts showed the currency at 30.88 per dollar in 12 months, more than 60 kopecks stronger than last week and over 10 roubles stronger than at the start of 2009.

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Economists are wary.

"At the risk of sounding ungracious, whenever we see such peaks in new money flowing into retail funds it more often than not signals the end of a rally and a negative turning for markets," Chris Weafer, chief strategist at UralSib in Moscow said in a note.

The rouble would have gained even more in recent weeks had it not been for the central bank's frequent interventions. The regulator shifts its bid level against the basket on the forex market by 5 kopecks for every $700 million it purchases.

The central bank has been more forthcoming lately in revealing its market interventions and monetary policy plans, but it still does not comment on regular basis on its actions.

The purchases allow the central bank to replenish its depleted gold and foreign currency reserves, but the rouble's brisk upward march has also fed concerns that if the global economy falters, investors will dump the currency -- just as they did late last year.

"Excessive currency volatility is harmful for the economy, for business," Ulyukayev said on Friday. "And it is indeed high at the moment." (Additional reporting by Andrei Ostroukh; writing by Lidia Kelly; Editing by Ruth Pitchford)

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