Where Is Rupee Heading?

It can touch 46.30/$

U VENKATRAMAN

Head of Money & Forex Markets, IDBI Bank

The dollar versus rupee story has come a full circle after the greenback hit a post-liberalisation high of 49.08 in May 2002.

In May this year, in 14 trading sessions, the Indian unit has appreciated by 42 paise registering the highest ever appreciation in a single month since January 2000.

Will the rupee hold on to its ground this time around? Or, will history repeat itself?

There has been a fundamental shift in the value of the rupee over the years. Historically trade flows were determining the value of the rupee but today the capital flows dictate the value to a large extent.

As the importers stay away from the market, the Reserve Bank of India has been mopping up the excess supply of dollar and forex reserves have gone up to $79.225 billion for the week ended May 16.

Since last week of January inflation has been on the rise and the domestic currency has been appreciating which will be very difficult for an economist to accept. The over-riding factors were rise in oil and other commodity prices.

Even though the inflation has started coming off in the recent weeks, based on the assessment of relevant factors the inflation rate expectation is in the range of 5-5.5 per cent.

Contrary to market perception that the dollar would rebound in the aftermath of a victorious Operation Iraq , the greenback is still losing ground against all the major currencies, especially against euro and those of the developing economies.

During the past one year, the euro has gained 30.6 per cent against the dollar, the pound sterling 11.37 per cent, the Swiss franc 20.92 per cent whereas the rupee has appreciated by 4.43 per cent.

The $4.5 billion Resurgent India Bonds are due for redemption during August/September 2003 and there is a perception that this may create a possible demand for dollars and dent the reserves.

Current US interest rates are low and with the US recovery proving elusive, the chance of one more rate cut is increasing. Under the circumstances, the entire RBI proceeds may come back to India as NRI deposits which will further add to the forex reserves.

With the expectations over riding the economic fundamentals the Indian rupee has potential to appreciate up to 46.30 to a dollar, the level it has seen in February 2001.

Technically speaking, if one looks at the Fibonnacci retracement levels from 46.30 seen in February 2001, every retracement levels has seen periods of stability and when the 61 per cent retracement cycle broke at 47.35 per dollar, the US currency had a free fall below Rs 47.

The appreciation is also in tune with the real effective exchange rate which is the inflation-adjusted exchange rate based on a basket of currencies comprising our trading partners.

As per the current real effective exchange rate, the rupee is under valued by 2.26 per cent and it has potential to appreciate up to 45.85.

On a cautious note, movements in the exchange rates may not be unidirectional. There is a huge systemic risk in unhedged exposures in the market and with the forward premiums at irrational levels. When the payables start hitting the market we may see some volatile movements.

There