Rupee breaches 41-level; rally may not last as futures quote premium

Rupee breaches 41-level; rally may not last as futures quote premium
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First Published: Thu, Apr 26 2007. 12 22 AM IST

Bulging muscle: A file photo of a currency trader discussing exchange rates with a caller. The rupee has risen about 15% since hitting a three-year low of 47.04 last July
Bulging muscle: A file photo of a currency trader discussing exchange rates with a caller. The rupee has risen about 15% since hitting a three-year low of 47.04 last July
Updated: Thu, Apr 26 2007. 12 22 AM IST
Mumbai: The Indian rupee continued its rally on 25 April, hitting a nine-year high after the Reserve Bank of India (RBI) opened the gate for capital outflows through a series of measures in its annual monetary policy on 24 April. And the central bank made it quite clear it would not intervene in the foreign exchange market to rein in the rise in local currency.
However, foreign exchange dealers said the rupee appreciation might not continue for long. This is because forward dollars (as in the value of the dollar at a future date) are still quoting at a premium. The futures market reflects the view on the future movement of a currency. This essentially means if the market feels that the rupee will continue to strengthen against the dollar, the value of forward dollar will be lower than it spot value. In other words, forward dollars should be sold at a discount to its spot value. This had happened on earlier occasions. However, now forward dollars are selling at a premium. For instance, one needs to pay 7% extra to book three-month forward and over 6% for six-month forward. “This means the market feels that the rupee will not continue to gain against the greenback, it will depreciate,” said the chief dealer of a private bank who did not wish to be named.
Bulging muscle: A file photo of a currency trader discussing exchange rates with a caller. The rupee has risen about 15% since hitting a three-year low of 47.04 last July
The local unit pierced the 41-level and closed at 40.91 to a dollar for the first time in nine years, taking its gains so far this week to about 2% and 6% this month. On 24 April, RBI announced a series of measures encouraging corporations, mutual funds and resident individuals to spend more dollars.
Other Asian currencies too appreciated on 25 April. For instance, Malaysia’s ringgit briefly hit a nine-year high just beyond 3.42 per dollar before suspected dollar-buying by the central bank capped the rally and the Singapore dollar rose as far as 1.5107 per US dollar, amid optimism about the local economy. The Philippine peso, under pressure earlier after the surprise resignation of national treasurer Omar Cruz, bounced back to test six-year highs as investors switched their attention to the positive economic outlook.
With the rupee breaching the 41-level, the local currency’s value is now 13% higher than its actual purchasing power, or the inflation adjusted value of the currency. Technically this is called the real effective exchange rate (Reer). The Reer is arrived at after comparing the rupee with a basket of six currencies that are India’s largest trade partners including yen, euro and yuan. “The fact that the rupee has breached 41 to a dollar, the first time since May 1998, is an indication that investors continue to bet on capital inflows and that the central bank would not intervene for now to check its gains,” said a foreign exchange dealer. The rupee is the best-performing Asian currency against the dollar so far in 2007 and has risen about 15% since hitting a three-year low of 47.04 last July. Since January it has gained 8.2%.
Till February this year, Indian public-sector banks were seen buying dollars from the market on behalf of RBI, but since March the rupee has been gaining against the dollar with the central bank staying away from the market. RBI bought $19.7 billion between November 2006 and February 2007 from the foreign exchange market.
Reuters contributed to this story.
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First Published: Thu, Apr 26 2007. 12 22 AM IST
More Topics: Money Matters | Currency |