Re appreciation may slow down in 2004-05

Seen touching 42/$ by March 2005.

The rupee will continue to rise during 2004-2005, because dollar inflows will continue. That's the word from most foreign exchange dealers. There is, however, no consensus on exactly how much the rupee is likely to appreciate.

Most foreign exchange dealers feel that the appreciation during this year will not be as sharp as it was in 2003-2004. Last year, the rupee appreciated by about 9 per cent against the dollar "" the highest it has ever appreciated. The rupee began the year at 47.40 to the greenback and ended at 43.65.

Buoyed by the foreign exchange inflow, the rupee has already gone up by 4.7 per cent against the dollar during the calendar year. It rose by 5.2 per cent last year and 0.6 per cent in 2002.

Still, most dealers say that the rupee will appreciate to touch 42 against the dollar by March 2005. Some even feel that it could reach that level in December.

That would mean about a 4 per cent appreciation. The rupee has begun the year at a closing level of 43.81. The level of foreign exchange, bankers say, can go up to over $150 billion from the current level of about $110 billion.

Standard Chartered Bank's forecast for the rupee is 42 per dollar by the end of the current fiscal year. According to Vikas Suri, head of foreign exchange and derivative sales at Standard Chartered Bank, the rupee could touch 42 a dollar by the year end. Dollar inflows and controlled intervention by the central bank would drive up the rupee's value, he said.

Barclays Capital's calendar year-end target too is 42. The Barclays official forecast cites the abundant foreign exchange inflows, which in turn will depend on economic growth, long-term returns and structural changes in the financial sector.

Not everyone thinks that the rupee's upward trajectory will continue for long. JP Morgan forecasts that the rupee-dollar exchange rate will be 43.8 in March 2005. It thinks the Indian currency is over-valued and will depreciate to 44.8 by March 2006.

According to Srinivasan Varadrajan, treasurer, JP Morgan, in the short term the rupee looks like appreciating on the back of inflows but it will depreciate in the medium to long term. This is primarily because the trade deficit could widen. Import demand may grow to support the economic recovery and the rupee "" which at present looks overvalued "" could then depreciate.

Yet a major public sector bank has stated that by March 2005, the rupee will hover in the range of 41.50-42 against the dollar, thanks primarily to foreign exchange inflows.

The bank believes that with the government having relaxed external commercial borrowing rules, Indian companies will rush to borrow overseas. This money will be added to the normal foreign institutional investor (FII) inflows.

The bank also feels that non-resident Indian (NRI) deposits will swell even if interest rates in other parts of the globe go up and the interest rate arbitrage opportunity gets killed.

UTI Bank's head of treasury Partha Mukherjee is of the view that even if rupee is slated to appreciate, the market will be volatile, with two-way movements.