RBI may mop up dollar from market

With the inflation rate expected to go down from 6 per cent (currently) to five per cent in the next three months, the country's financial sector is expecting the Reserve Bank of India (RBI) to mop up dollars from the market.

Coupled with some moderation in capital inflows, this is expected to help the rupee to depreciate to between 42 and 43 to a dollar from around 41 now.

The rupee has strengthened 5-6 per cent in the last one month or so, threatening to erode the competitiveness of Indian exports in the global market.

According to Amitabh Chakraborty of Religare Securities Ltd, the rupee will depreciate against the dollar in the next three months as the RBI may start buying dollars under the Rs 1,10,000-crore Market Stabilisation Scheme.

Besides, there will be a higher dollar demand for oil imports due to rising oil prices, and also because of other imports going up.

To contain inflation, the RBI has so far desisted from infusing rupee into the system by buying dollars.

Experts say that capital inflows this year could be impacted on account of lower portfolio investment, which too is expected to contribute towards the weakening of the rupee in the next three to six months.

The scenario was just the opposite last year when rising portfolio investments were the main trigger for the appreciation in the rupee.

"I expect some slowdown in capital inflows particularly in equity market following the deflationary impact of foreign exchange, which has made the stock market a bit overpriced. External commercial borrowing and FDI in real estate will continue to trigger rupee appreciation. But, the increase in interest rate and widening trade deficit may result in rupee depreciation," said forex consultant AV Rajwade.

But foreign direct investment would continue to be strong during the year, the experts said. Chakraborty said that there could be strong inflow of capital to India due to a softening of interest rates in key markets like the US and Japan.

"Even if the capital inflows will remain strong, macro fundamentals do not support a strong rupee since trade deficit is very high and is expected to widen further" said Ajit Ranade, chief economist, Aditya Birla Group.