The Hindu : Rupee strengthening against dollar

Online edition of India's National Newspaper
Thursday, Jan 09, 2003

Business

Business

Rupee strengthening against dollar

By Oommen A. Ninan

MUMBAI JAN. 8. The rupee may appreciate further against the U.S. dollar in the calendar year 2003 on the lines of other international currencies' movement, which have also been gaining strength against the greenback. Further, the market is expecting that the Indian currency will henceforth move at market-determined rates.

In 2002, the rupee started with a bearish trend and slowly breached the 49 a dollar level in June. At that point in time, it was felt that Rs. 50 to a dollar was very much on the cards. It was expected that the level would be reached by Diwali . But then came the reverse trend as the rupee started gaining strength and gained steadily to touch a high of 47.97 pre-Christmas and closed the year at 47.92.

This was totally unexpected but this was achieved largely due to the Reserve Bank of India which was continuously monitoring and buying dollars at regular intervals to control the speed of reverse volatility (while strengthening), especially during the last quarter of the year. This is the first time when exporters were caught unawares by the steady strengthening of the rupee.

However, a bunch of exporters who had hedged their receivables during May, June and July last calendar year, for six-month forward, were able to get a realisation above Rs. 50 to a dollar with the help of the forward premium, while the spot rupee was around 48.70-49.

The RBI, which would ideally want the exchange rate of the rupee to be at the market-determined rate, could not have been disappointed in 2002 as the rupee smartly recovered against the dollar. This is because at this point, globally, the dollar has been down quite sharply against other major currencies, which is also reflected in the case of rupee-dollar exchange rate.

"It's not far away when we would see the rupee moving both ways as in the case of other international currencies. This leads to market determined rates. If one has to compare the rupee with the real effective exchange rate (REER) the rupee is undervalued by around 2 per cent. If that is the case the rupee should be at around 47.10. However in our view in the new year given the present trend the rupee could be around 47.75 by March 2003," said K. N. Dey, Director, Basix Forex & Financial Solutions.

Another school of thought, however, believes that the appreciation of the rupee may not sustain. "The only different thing last year was that the Indian currency appreciated slightly for the first time. The rupee may move up against the dollar in a 25 paise range till the end of March 2003. However I feel higher chance of depreciation rather than appreciation," said M. R. Madhavan, Senior Research Analyst, Bank of America.

DSP Merrill Lynch in its report stated that the rupee was likely to appreciate rather than depreciate from the current levels.

According to them, the key trends witnessed during the calendar year 2002 that can sustain through the calendar year 2003 and support appreciation of the Indian rupee are: strong trade and invisible inflows (NRI remittances); surge in forex reserves; the weakening of the dollar; and the forward premiums are significantly higher than what the spot is expected to depreciate to.

As the rupee starts moving both ways at market determined rates, corporates should have a risk management framework in place, which includes policy, procedures, and benchmarking so as to avoid any adverse currency movement in their day-to-day affairs.

Further, as rupee options are expected to come in shortly, the market will see more action on the rupee. Said Mr. Dey, "This is the crucial time when exporters should use their own mechanism to hedge their receivables rather than waiting for the fall of the rupee or RBI to come for their rescue".

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