Rupee likely in 44.75-45.25 band

OUTLOOK/ CURRENCY

The spot rupee is expected to hover in the 44.75-45.25 range this week. The market feels the rupee will be supported in the 45.10- 45.15 range by the Reserve Bank of India.

As a policy stance, the apex bank has been intervening in the spot market by selling dollars to pull up the rupee. This is aimed to cushion the effect of the surge in international oil prices on the domestic inflation rate.

Although the markets will remain volatile with two way movements, dollar sales by exporters will continue to force rupee to appreciate, dealers said.

Although last week saw the dollar weakening against most currencies globally, it could have strengthened against the rupee had the RBI not stepped in to support the rupee by its reverse intervention.

The bearish outlook on the rupee, however, has been stirred by the fear of a sell-off spree by foreign institutional investors (FIIs).

Foreign investors are understood to be liquidating their positions in India and remaining in a wait-and-watch mode till the budget.

Budget, to be announced in early July, remains the next trigger for getting a clarity on the new government's stance on important policy matters.

However, during his visit to Mumbai last week, finance minister P Chidambaram assured FIIs and subsequently there have been net inflows into the system, which has contributed to the rise in the rupee.

Foreign exchange inflows reversed its falling trend, rising by $1.24 billion to $119.82 billion in the week ended May 28, 2004, compared with $118.572 billion in the previous week.

Dealers split on trend in forwards

There are two views on the expected movement of forward premium this week. While one section feels that, in order to check the impact of the hike in oil prices, the RBI would keep the rupee appreciating till the oil payments are over.

Till the time rupee will appreciate, importers will rush to cover their near-term payment obligations. This will keep forward dollars in premium.

The other view is that exporters are panicky and will rush to realise their receivables with every bout of depreciation of the rupee. Therefore, with exporters rushing to cancel their contracts, dollars will again come back into discount.

At best, the dealers feel, forwards dollars will oscillate from being in discount to ruling in premium. However, the RBI is understood to have entered into sell-buy swaps to ensure cash dollar liquidity in the market towards June 15, which is when oil payments are due. This will avert forward dollars from going into discount.