Rupee set to cool after RBI calibration

Rupee set to cool after RBI calibration
REUTERS

MUMBAI, MAY 28: Stability is likely to return to the rupee this week after recent falls, with the central bank's tested recipe of allowing a controlled depreciation of the currency expected to work again, analysts said.

After a steady 12 months during which it slipped just two per cent against the dollar, the rupee has fallen 2.5 percent in the past three weeks, catching the market by surprise and adding a speculative edge to dealings.

The Reserve Bank of India (RBI) acted on Thursday, warning against speculation and announcing measures to prop up the currency, but still leaving a lingering signal that it had no targeted exchange rate. Most bankers believe the rupee's move was partly engineered, nothing new for a market that has witnessed such periodic and sudden depreciation since 1996 and, on hindsight, it was warranted.

The US dollar has strengthened against global currencies, the rupee was losing export competitiveness, a rise in inflation had made it overvalued and locally, flows were getting skewed as corporates took the rupee's stability for granted. "The rupee has been trading in a narrow range against the dollar, and will continue to be in a narrow but lower range," Surjit Bhalla, director of Oxus Fund Management said.

"Because of the somewhat higher inflation, the fair value of the dollar against the rupee had risen to 43-44.50 compared with earlier levels of 42.50-44.0. That has been adjusted," he said. "With the strength of the dollar in particular and the weakness of regional currencies, the adjustment of the rupee is not surprising," said Dominic Price, head of JP Morgan India.

Inflation based on wholesale prices hit an 18-week high of 6.38 percent in the week ended May 13, a three-fold rise since February, but analysts are not worried since core inflation is at comfortable levels. But it meant the rupee, adjusted for inflation, was too firm.

Besides, while the yen has fallen 4.8 per cent since January, the Indonesian rupiah 17.75 percent, the Philippine peso 5.88 percent and the Thai baht 4.0 percent, the rupee has been steady.

The mammoth government funding programme was one reason for the RBI to chose the proven method of triggering a rapid correction, analysts said. With Rs 1.17 trillion ($26.36 billion) to be raised in 2000/01 (April-March), lingering bearishness in the currency and bond markets was unwelcome.

"If there is recognised stability in the rupee after this, the RBI can get on with its task of funding the huge government borrowing without continuous distraction," Price said.

The rupee ended Friday at a record low of 44.37/38, but analysts predict it will stay strong during the year, supported by a comfortable current account and foreign capital inflows. The recent lull in foreign capital inflows is seen as temporary and flow of funds from both portfolio investors and international offerings should pick up, analysts said.

Foreign institutional investors turned net sellers in equities in May, but their investments totalled $1.6 billion in the first four months of 2000, higher than the amount they invested in all of 1999. Despite all the optimism, there is little hope of the central bank easing the highly restrictive rupee trading rules.

The rupee is convertible only on the current account, and daily market volumes are half their levels three years back. The RBI has maintained it will allow market forces to set the trend so long as there is no speculation or excessive volatility. And, on Thursday, further curbs were imposed when interest rates both on import finance and overdue export bills were hiked to ensure corporates do not bunch up flows.