RBI's $ buys may not spur demand

The recent spot dollar demand by state-owned banks on behalf of the Reserve Bank of India is unlikely to cause any unusual spike in dollar demand as the view on the rupee is still positive, corporate treasurers said. The rupee's rise is not expected to be steep due to the constant buying by the central bank, they said.

"The current demand by the RBI in the spot market is more to keep the rupee steady rather than weaken it," said Anand Nesarikar, assistant general manager - forex, Jindal Viyanagar Steel.

"But the demand from the central bank may not necessarily result in demand from companies, as dollar supplies are likely to continue."

Since the start of this month, state-owned banks have been soaking up dollar supplies on behalf of the central bank.

This checked the appreciation of the local unit, despite the robust inflows of dollars. Such inflows lifted the Sensex to a record 10,000-mark this month.

In the month to February 10, foreign funds invested U.S. $825 million in Indian equities, much higher than $705 million for the whole of January.

"The demand from RBI was because of three factors: to infuse rupee liquidity, the control the overvaluation of the rupee, and to add to the reserves after the IMD redemption," Nesarikar added.

Liquidity has been under pressure over the past two months following third quarter advance tax payments by companies and 330-billion-rupee outflow for redemption of State Bank of India's Millennium Deposits.

The call rate has been high at 7 per cent "� much above the notional 5.50 per cent "� because supplies have not been enough to meet banks' liquidity needs.

Another reason for the RBI to prevent the rupee from rising is because the real value of the rupee is overvalued almost 10% on trade-weighted basis.

Also, other Asian and leading currencies have been weakening against the dollar, while the rupee has been supported by FII inflows.

But in the long term, the Indian unit is expected to remain supported by such dollar inflows due to positive outlook for the economy, treasurers said.

"I expect the rupee to be above Rs 43 per $1 by the year-end (December) because the budget is likely to be positive," said R Govindan, treasurer, Larsen and Toubro, adding that once dollar purchases by RBI stops, the rupee may appreciate.