Currency experts say the Indian rupee, that has appreciated about 12% against the dollar in 2007, will continue to rise against the dollar in 2008 but move in the 38-41 band to a dollar.
After nearly three decades, the rupee has appreciated 12% against the greenback and about 6% against a basket of six major world currencies belonging to the US, the UK, Japan, Euroland, China and Hong Kong. The rupee began the calendar year 2007 at Rs44.26 a dollar.
Fraught with volatility through the year, on 7 November, it touched a 10-year high of 39.16 per dollar, but ended at 39.33 that day amidst heavy intervention by the Indian banking regulator.
The Reserve Bank of India has continuously been buying dollars from the market through a few public sector banks to rein in the runaway appreciation of the rupee as a strong local currency hurts exporters’ income in rupee terms. It has bought more than $90 billion from the market this year. On 27 December, rupee was trading at 39.42 to a dollar.
“Much of the burden of US dollar weakness may be felt against emerging markets rather than major currencies. In terms of overall valuation, Asian and Gulf country currencies still have room to appreciate in near term,” said a recent global focus report issued by Standard Chartered Bank.
According to the report, currencies such as Euro, sterling and Swiss franc are “obscenely overvalued” against the US dollar. Commodity currencies such as the Australian dollar, New Zealand dollar and Canadian dollar are similarly overvalued. It predicts that the US dollar remains in a “multi-year downtrend.”
Though the economies of China and India are now driven by “higher intra-regional trade and more balanced overall growth through stronger domestic demand,” the report does not rule out the impact “on Asia and elsewhere of a major slowdown in the world’s largest economy.”
According to a UBS AG report, the current “uncertainty” in the global financial markets will weigh heavily on the Indian rupee.” Softer economic data, uncertainty in global financial markets as well as higher oil prices are not the right mix for INR strength,” says Dominic Schnider, a forex analyst, in a recent UBS wealth management report.
A.V. Rajwade, an independent forex expert, expects the rupee to fall further. “There is a greater probability of a fall in rupee from the current level in relation to the presently quoted forwards,” says Rajwade.
In the forward rate market, three-month rupee is trading at a premium of 1.91%, and the six months premium for the local currency is 2.02%, according to Reuters data.
According to Jamal Mecklai, chief executive officer of Mecklai Financial and Commercial Services Ltd, the rupee will see volatility in 2008. “It will range between 38 and 41 a dollar. I think the dollar will be stronger than what many people expect. The rupee will weaken initially but when the subprime crisis gets over, we will see money flowing into India more aggressively and the rupee will bounce back,” said Mecklai. He expects a two-way movement in rupee next year.
Indranil Pan, chief economist of Kotak Mahindra Bank Ltd, also shares a similar view on rupee movement. “We expect rupee to weaken to 40.25-40.50 a dollar in phases, but likely to come back to 39.50-39.75 a dollar by end-March.” Trade deficits, along with slowing capital inflows, and a depreciating euro could trigger some depreciation in rupee, according to Pan.
The main reason behind the rising strength of the rupee is huge capital inflow into India. Foreign institutional investors have bought stocks worth more than $16 billion this year net of their sale of Indian equities.
Schnider of UBS said equity inflows are volatile in nature and can weaken the rupee sharply in the event of political or economic uncertainty. According to him, RBI will thus continue to remain “vigilant” and “moderate appreciation pressure on the rupee in the light of slower global growth.”