Budget booster for rupee

OUTLOOK/ Currency

The spot rupee is expected to hover in the 45.50-80 range against the US dollar this week. After the Budget, the rupee is expected to gain.

Except for the transaction tax, other announcements pertaining to the external sector are perceived to be investor-friendly. The dealers thus expect good dollar inflows.

Till now, foreign investors have been fence-sitters, waiting for a cue from the Budget. Over the last few weeks, the spot rupee has been depreciating with dollar demand from foreign banks.

Although markets will remain volatile, with two way movements, the bias remains towards an appreciation. The dollar has been losing continuously to other global currencies.

Meanwhile, forex exchange inflows for the week ended July 2 stood at $120.07 billion, registering a gain of $671 million. Similarly, there has been a growth of Rs 3943 crore over a week in rupee terms.

Some dealers feel the debt market will see additional inflows to the extent of $750 million (or over Rs 3000 crore).

However, another section is of the view that this might not result in a major change in inflows as rate hikes elsewhere in the world are pushing foreign institutional investors for reverse capital flow from Asia's emerging markets to the developed economies.

Forward premiums may drop

Premiums on forward dollars are likely to go down as the market sentiment is bullish and the rupee is likely to appreciate.

Two factors are supporting this movement. The dollar has been depreciating against all major currencies last week and, as an effect of this global depreciation, the rupee is poised to appreciate.

Secondly, inflows, which has been major source of dollar liquidity in the market, have caught momentum following the positive impact of the Budget which hiked the limit for foreign direct investment in the telecom, insurance and aviation sectors.

Moreover, the investment limit for foreign institutional investors (FIIs) in the debt market has been hiked from $1 billion to $1.75 billion. Although it has been taken as a strong measure, the signal has acted as a positive trigger for the market.

Dealers expect that, besides the demand from oil companies, there will not be much demand from the corporates. Till the week before last, corporates were busy covering their open positions fearing further depreciation in the rupee.

Interbank players, on the other hand, will continue with their sell-buy swaps where in they will receive dollars at a later date to meet corporate demand.