'Further slide likely'

By Oommen A. Ninan

MUMBAI, MAY 10. The Indian rupee may go down further as the negative sentiment grips the foreign exchange market. Further, the market participants believe that the Reserve Bank of India has allowed the rupee to fall by remaining on the sidelines.

``If this negative sentiment continues we might see the fall of rupee to Rs. 44.25 a dollar in the next 10 days,'' said Mr. K. N. Dey, Senior Vice-President, eMecklai, a leading foreign exchange dealing firm. He said the first hour of trading on Friday morning was very crucial - it is opening after the closure on Thursday due to a bank strike. Usually the first hour of trading determines the direction of the market.

Today the Indian currency closed at the all time low at Rs. 44.07 a dollar. This year's fall started on Tuesday when the rupee closed at 43.68 to a dollar. Mr. Dey said that negative sentiment had been building up in the market for one or two days. Alongwith this the combined forces of FII outflows and the oil import bill had moved the rupee down to the all time low. The Union Finance Minister has however pointed that the rupee's fall to a new low against the dollar was due to a temporary demand supply mismatch. But the market does not believe it is temporary.

From the beginning of this year major currencies such as the euro, pound and Swiss franc and other south East Asian currencies such as the Indonesian rupiah and Korean won have steadily depreciated against the dollar whereas the rupee had remained relatively stable against the dollar and this had led to a rupee appreciation vis a vis most other currencies. ``To realign this,'' said Ms. Sangya Nigam, Analyst, eMecklai, ``it may be a deliberate attempt to push the rupee down.'' The market will closely watch for any indication from the central bank to support the rupee. Compared to the inter-bank rate of Rs 46.05 per euro on May 11, 1999, today's rate is Rs. 39.60. While the euro has fallen against the dollar by almost 16 per cent, the rupee has fallen against the dollar only less than 2.5 per cent.

On May 11, 1999 the Indian rupee was at Rs. 42.72 a dollar while the benchmark six month premium was 5.86 per cent and one year premium 6.66 per cent. Considering the one year premium in last May, if an exporter had sold forward at that time he would have earned around 5 per cent more, at Rs. 45.45 per dollar, which is even more than today's inter-bank rate of Rs. 44.07 a dollar. The benchmark six month premium too has come down by almost 4.5 per cent percentage points in one year to today's 2.20 per cent as compared to 6.60 per cent on May 11, 1999.

The premiums have remained low due to the RBI not allowing importers to cancel and re-book their trade and non-trade (foreign currency loan) exposures, it is stated. Therefore, importers did not come into the forward market and as a result the premiums have remained very low and subdued. The six-month premia have fallen to 2.12 per cent in May which is a six year low. Today's premium is by far the lowest since September 1994. The last low of six month premium was recorded in September 1994 at 2.22 per cent.

It is pointed out that the last three years performance shows that the month of May has been the month of mayhem for the rupee when volatility has reigned. The Pokhran blast was on May 11, 1998 and the rupee started falling from May 14 onwards that year, after the sanctions imposed on India by the U.S. and the down grading of India's sovereign rating by major international rating agencies. On May 10, 1998 rupee was steady against the dollar at Rs 39.78. From May 14 it started falling gradually and hit 43.70 a dollar on August 20. At this point the Reserve Bank intervened by bringing in strict measures and the rupee returned to Rs 42.65 in a matter of 10 minutes on the same day. In 1998, from May to August the rupee suffered speculative onslaught and was highly volatile. During the Kargil crisis last year the rupee started falling from May 27. It declined from 42.75 and settled at 43.40 a dollar. However, the earlier moves of the RBI and its close vigil on the foreign exchange market helped the rupee fall only by 2 per cent.

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