BOMBAY, 26 May 2003 — The world indeed seems to be a weird place today. If you are an Indian, it has been drummed into you that the Indian rupee always depreciates against the US dollar. Now all this has changed, leaving us all utterly confused and befuddled. Costs of fuel, petrol and diesel have always surged, hence it was shock last week to see the government announce a reduction in rates. It was just Re.1; nevertheless, it was a fall and not a rise. This in itself was difficult to digest. And to add to the confusion, the fast appreciating Indian rupee against the American dollar has numbed the senses.
Last week, the rupee made history. The rupee climbed to a two-year closing high, boosted by surging dollar inflows from exporters and investors. The local currency ended at 46.90/91 per dollar. With this, the rupee had gained a whopping 24 paise against the dollar in the first two days of the week itself. At that level, the rupee had gained 110 paise since the start of the calendar year and 62 paise in the current financial year. The rupee is now stronger by 218 paise since May 16 last year when it touched a lifetime low of 49.07 in intra-day trades. In May this year, the local unit has so far gained 46 paise. The appreciating rupee has reached a level last seen some 23 months ago, on June 28, 2001.
The appreciating rupee brings joy to a patriot but as an NRI, it makes the heart heavy as every paisa of appreciation of the rupee means a direct hit on the bank balance. So why is the rupee surging and how much more will it surge? The NRIs may be worried but the Reserve Bank of India (RBI) is not perturbed.
Deputy Governor Rakesh Mohan said, “We are rather comfortable. We feel that the movement of the exchange rate is adequate, considering the happenings in the international market and the kind of currency alignments taking place internationally.” Even the forex experts are unconcerned. They feel the rupee is still undervalued by about 2.5 percent on a real effective exchange rate (REER) basis and it is still adjusting to the weakness in the dollar. They say that there is room for more appreciation, dealers say that the rupee could touch 46.75 by the end of June.
If crude prices come down, inflation stays low and the dollar weakens further, the rupee could see an upside of about 3-4 percent over one year. Experts say unless there is growth in India’s manufacturing sector and dollar demand goes up because of that, the RBI is unlikely to spend its $78 billion reserve to defend the dollar.
Another reason is the pressure in the global markets on the dollar. The dollar has depreciated about 11 percent this year to 1.17 to the euro. Analysts predict more dollar selling coming in. Other frequently mentioned causes for the rupee appreciation are favorable macro-economic conditions in India prompting enhanced foreign direct investment inflows, the fall in international oil prices and a satisfactory export performance. Infact a lot of smart NRIs are making the most of this dollar surge. Large chunks of weekly dollar inflows to India are coming from non-resident Indians, who are borrowing abroad at 150 basis points above LIBOR and are gaining a neat 3 percent arbitrage on interest rate by putting that money into deposits in India.
And how is this surging rupee affecting the Indian exporters. Till now, the exporters are not much perturbed. Most exporters would be all right till the rupee is at 46.50 to the dollar. But if it stayed above that level for a few months together, India’s traditional exports’ price competitiveness could then suffer. But it would be childish and immature to assume that the dollar will continue to move downward against the dollar for an indefinite period of time. This is probably a correction which was long overdue and once the dollar reaches its realistic level, the fall will stop and once again the dollar will start climbing up. At that time, there will be a virtual stampede to take cover, like the mad rush seen now to sell.
