'Rupee may remain stable in Y2K'

By Oommen A. Ninan

MUMBAI, DEC. 31. The Indian rupee's prospects for the coming year seem far more assured than they were at the beginning of 1999. While bears believe that the rupee will depreciate in the year 2000, bulls believe it can appreciate against the U.S. currency.

``In the new year the rupee will remain under control from the Reserve Bank though we might see a fair amount of relaxation on the measures. Hopefully if there is no external problem then the rupee might close 4 to 5 per cent lower coming December,'' said Mr. K. N. Dey, Senior Vice-President of Mecklai Financial. He hopes good inflows in the coming year, namely foreign direct investment (FDI) and foreign institutional investments. Mr. Dey added, ``The RBI could also keep buying excess dollars to keep the rupee under control (from appreciating) and it would try to avoid any undue volatility in the market.''

The rupee with the slight turmoil during the Kargil war ended around 2.5 per cent lower from the beginning of the year which of course is not a very big fall as compared to other currencies like the Euro. Basically, the fall of the rupee was due to a bearish sentiment rather than any fundamental reasons. Again full marks to the Reserve Bank for keeping the rupee under control and preventing any major catastrophe.

In the beginning of 1998, spot rupee was trading at Rs. 39.20 against the dollar but ended the year at Rs. 42.52. Whereas, in 1999 it started at 42.50 and ended at 43.49.

If an exporter had sold his forward dollar for December 1999 at the beginning of the year he would have got Rs. 45.78 (spot of January 3, 1999 was 42.40 and premium at that time was 8.2 per cent for December) rather than Rs. 43.40 today. Said Mr. Dey ``This shows partial export hedging is not a bad idea at all as compared to waiting for any opportunity profit.''

The bulls believe differently. ``I think the rupee had the potential to appreciate but for the RBI's policy of not letting it appreciate beyond certain levels,'' said Ms. Sangya Nigam, analyst at Mecklai Financial. According to her, when the Y2K fear subsides and the insurance sector is opened up the Indian unit should come back to below 43.50 levels. Further lot of FII money will be coming into India around March, ``I see a stable rupee in the near future and it should trade anywhere between 43.45 and 43.65 against the dollar.'' As India has seen many political upheavals in 1999, even if one more happens the rupee has learned the lessons and will be much more stable this time, Ms. Sangya added.``The Indian rupee will do an encore of 1999 against the dollar in 2000,'' said Mr. Vasan Shridharan, Economist of Standard Chartered Bank. He said the rupee's 1999 performance was also significantly well above par, bettering the average annual depreciation of 6.3 per cent over the past five years. ``But this year's performance is not an aberration, he said, adding, ``the Indian rupee is capable of producing another above par performance against the dollar in 2000.''

Measured on a real effective exchange rate, the Indian rupee has remained broadly stable in 1999. According to him, the combination of a softer global greenback and an amiable inflation rate in the country had helped the rupee maintain an above par performance against the dollar.

The Bombay Stock Exchange (BSE) Sensex is a an indicator of the confidence foreign institutional investors have in India's economy. In 1998, the BSE Sensex started at 3659 and ended at 3055, down by 17.3 per cent and in 1999 it started at 3060 and ended at 5005, an appreciation of around 54 per cent. Another factor which affects the value of the rupee, inflation, has been coming down from 7.01 per cent at the beginning of 1999 is around 2.84 per cent now. The industrial production and exports are up. The worrying factor is the oil payments as the oil bill has nearly doubled in 1999.In 1999 the rupee behaved in a highly mature manner. The movement was range bound. The only two occasions on which the rupee saw volatile movements was during the Kargil crisis in May-June and the political crisis in September-October. Unlike 1998, when premiums were as high as 15 to 22 per cent, the premiums have been steadily coming down since the beginning of this year; In January 1999, the six month annualised premium was around 10 to 11 per cent and now at the year end the premiums are at around 4 per cent.

Moreover, at the beginning of 1999, the indications given by the Finance Minister, Mr. Yeshwant Sinha, and the RBI Governor, Dr. Bimal Jalan, were towards lower interest rates and it started right after the budget when the repo rate was reduced from 8 per cent to 6 per cent, the Bank Rate from 9 to 8 per cent, and cash reserve ratio (CRR) from 10.5 to 9 per cent. In fact, during the mid-term review of monetary and credit policy in October, the CRR was again reduced by one percentage point. On December 28, the Deputy Governor of RBI, Dr. Y. V. Reddy reiterated the central bank's intention to reduce CRR to 3 per cent over the medium term. Dr. Reddy's statement caused the premiums to fall further from 4.30 per cent to 4.12 per cent (six months). Now it is moving towards 4 per cent.

Said Ms. Sangya, ``At the end of 1999, I think the prospects for the rupee look much more assured than what it was at the beginning of the year.'' Just from the trend of forward premiums one can say that there is a distinct strengthening expectation of the rupee. Against 8 per cent in December 1998 the 12-month forward premium now is around 4 to 4.5 per cent, six month premium is at 4 per cent against 7.5 per cent last year and 3- months is around 3.5 per cent against 6 per cent earlier. This speaks a lot about the confidence of people in the Indian currency.

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