'Demand supply mismatch may exert pressure on rupee'

By Oommen A. Ninan

MUMBAI, JULY 8. A mismatch between demand and supply of dollars and high crude oil prices are likely to exert further pressure on the Indian rupee vis-a-vis the dollar.

``The rupee is likely to face a severe test against the dollar in the coming days,''' said Mr. N. Subramanian, forex analyst of e- Mecklai, a leading foreign exchange firm. During June, the Reserve Bank of India (RBI) had succeeded in reining in the charging dollar. According to him ``the temporary mismatch between demand for and supply of dollars seems to have caused a permanent damage to the rupee.''

After touching a record intra-day low of 44.95 a dollar on June 8, the rupee has progressively recovered and was trading in a narrow range of 44.64 and 44.69. However, in the last few trading days the Indian currency again came under pressure as it slid to 44.75 to a dollar.

The renewed dollar demand is stated to have been caused by several factors. The international prices of crude and petroleum products have not come down this summer and are threatening all oil importing economies including India.

According to the analyst, the already poorly managed public administered mechanism, which is to be replaced by a market mechanism in a phased manner is under severe stress and the reluctance of the Government to adjust domestic prices to the international trend - the rupee's recent fall against the dollar would have already resulted in a higher price in terms of the local currency - would only aggravate the current problems, it is stated.

Further, the inflow from foreign institutional investors (FIIs) has not only slowed down in May but has in fact reversed with there being an outflow of more than $200 million in June. In May, the net inflow was only $57 million.

The inflow has not picked up despite a stock market rally. Eventhough there are no signs of a major sell-off by them in equities and large scale repatriation so far, one can imagine its impact on the rupee in such an eventuality.

The Government's huge borrowing programme along with surging inflation is a further threat. The climbing rate of inflation is alarming and things are not looking too good with crude prices hovering around $30 a barrel and prices of commodities which form a major chunk of India's imports also higher than they were last year.

Interest rates are likely to firm up with around 70 per cent of the Government's huge borrowing programme still to be completed. A recent report of ICICI Securities states, ``Assuming that 80 per cent of the budgeted borrowing programme is completed by the end of October, with just around 32 per cent of the borrowing programme completed till date, around Rs. 14,000 crores of issuances per month are necessitated till October. As July happens to be the month with maximum inflows, around Rs. 17,000 to 20,000 crores of issuances during the month could be expected.''

ICICI Securities has stated, ``We expect the overall balance of payments position for the fiscal to be comfortable, but there could be a high demand for dollars in the immediate future, exerting pressure on the rupee.''

Some of the positive aspects: The monsoon has made a good beginning and corporate results are impressive and showing a recovery.

Most of the big players are undergoing major restructuring and refocusing on their business plans for the future. Most badly managed companies are an easy target for takeovers. However, most of the companies' values in terms of U.S. dollars look far from attractive for FIIs.

On the external side, the recent weakness seen in Southeast Asian currencies, especially the steep fall of the Indonesian rupiah and the Sri Lankan rupee, is a cause for concern.

What will happen if the Chinese decide to devalue their currency by a hefty margin like they did in 1985? Will India repeat its 1991 act? In July 1991, the RBI did two quick devaluations bringing down the value of the rupee by about 20 per cent. Mr. Subramanian said, ``These are quite disturbing prospects.''

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