BOMBAY, 21 January — Last week, the Indian rupee was weak and it closed near an all-time low of Rs.48.43 vis-a-vis the US dollar. Infact, post Sept. 11, 2001, the rupee instead of having tumbled down drastically, remained rock steady and even managed to gain some ground. But now, the Indian rupee seems to have turned weak with the turn of the new year. It all started on Jan. 7 when the Indo-Pak tension increased to war like proportions and thus pushed the rupee to it’s lowest close ever.
At the moment the rupee is steady with demand and supply of dollars almost evenly matched. Though the portfolio inflows have been positive at $185 million during this month, the foreign investors have slowed down their purchases during the last few sessions probably due to the weaker trend in international stock markets. Nevertheless, the Indian stock markets have showed resilience despite most of the international stock indices especially the US markets being deep in the red.
Now the million dollar question in everyone’s mind is what would happen to the Indian rupee? Will the Indian rupee go down further or remain more or less steady.
Well, in the coming days, much would depend on how the political drama unfolds on the borders. The expectations are for a slight easing of the tension. However this might provide just a brief respite for the rupee. The week ahead might see rupee holding below Rs.48.43 all-time low and recovering slightly. But it is expected that the greenback will be in good demand near Rs.48.30 and eventually the rupee would fall past Rs.48.43 to about Rs.48.60 and then Rs.48.80. The closing level for current fiscal is forecast at Rs.48.75-48.90.
Currently at Rs.48.20 to the dollar, the currency has already lost 3.61 percent against the dollar in the current fiscal, but is slated to fall further and may test the 48.50 mark by this month-end.
There is also news that Pakistan may soon move to a single market to buy dollars from exporters and if this does happen, the Indian currency might drift lower toward the kerb rate and would result in further blunting India’s export edge especially in exports of commodities.
Infact forex analysts are of the opinion that based on the trade-weighted real effective exchange rate basis, the Indian currency is overvalued to the tune of 1.5 percent. Hence, they state that a further fall of the currency against the dollar is definite. And they blame the foreign institutional inflows (FIIs) for the overvaluation. Why? The net aggregate FII inflow in the first 15 days of 2002 was $194 million. In calendar year 2001, the net inflow was $2.850 billion — the highest since the sector opened up in 1993.
Even though FII inflows have been enough to strengthen the rupee, public sector banks were seen buying dollars heavily from the market. And over the last few days these banks have mopped up more than $1 billion from the market, causing the rupee to fall further.
And these dollar purchases were stated to be made mainly on behalf of the Reserve Bank of India (RBI) to correct the rupee’s overvaluation and this is where the entire problem for the rupee emerges as a strong rupee due to the FII inflow leads to a volatility which is usually associated with such kind of flows. RBI, based on the current volatile political situation, naturally felt that the FIIs would logically prefer to move out all their as far away from Indian as possible and hence to cushion the country from such an eventuality, advised the public sector banks to buy.
Dealers said the fall in the rupee may have been engineered to help India’s export competitiveness. The RBI seems to be working on the logic that a weak rupee could also help beef up exports. In the first eight months of the financial year (April-November), exports grew by only 0.5 percent against a 21.1 percent increase during the corresponding period of 2000-01. So, if the currency goes up against the dollar it could hurt the exporter’s interest. But petroleum imports, responsible for causing the erosion of the currency against the greenback last year, recorded a sharp fall of 13 percent in the first eight months of 2001-02 against a rise of 71 percent in the corresponding period of the last fiscal.
Forex analysts are unanimous in their opinion that the RBI is likely to adopt the measure more because the Japanese yen and some other international currencies staged a sharp fall against the dollar in recent times. In the last one month, the yen fell by 3.66 percent against the dollar, while the Indonesian rupiah dipped by 2.01 percent. The Indian rupee, however, went down by only 1.14 percent during this period. This actually made the Indian currency stronger against these two currencies, hampering the competitiveness of the country’s exporters.
Dealers said export flows, which have been strong through the week, could be sustained. But they also expect state-run banks will keep up their absorption of larger flows. And it is also expected that the current inflows of foreign portfolio investments would continue, keeping the dollar pressured.
So in the days to come, hold on to the dollars and watch it climb up.
