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Firm crude prices to speed up rupee's rise against dollar

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Crisil Marketwire Mumbai
Despite the convergence of a slew of negative factors, the medium-term outlook for the rupee remains bullish, said U Venkataraman, head of money and forex at IDBI Bank.
 
Firm crude oil prices and slowing foreign fund inflows into the country will not derail the rupee's rise against the dollar, but only temper the pace, he said.
 
"Overall sentiment for the rupee has not changed. Imports are being covered only on a cash basis," Venkataraman said.
 
"This can also be seen from the movement in forward premiums, where there has not been any major import booking."
 
According to Venkataraman, corporate dollar demand has been consistent, but they have been balanced by inflows from exporters and foreign funds.
 
"Going by the price action, commercial demand has been coming in. Capital market flows are not as high as they have been in recent times and demand from oil companies is also firm. But this demand is getting absorbed by the daily flows that are coming in," he said.
 
After investing $1.9 billion in the first couple of weeks this month, foreign funds sold $56.1 million on couple of days last week. Though funds again invested $55.8 million during March 17 to 21, the market is awaiting sustained buying in the stock and debt markets, which will improve sentiment.
 
"Going forward, there could be a marginal correction in the rupee. But the medium-term trend is bullish," Venkataraman said.
 
"India, as an investment destination, is still attracting flows from foreign investors. There are lot of companies in the small and mid-cap segments where the price to earnings ratio is still good for investments."
 
Venkataraman sees the rupee in the 43.10-43.30-rupees per dollar range by December-end. Surging crude oil prices in the global markets will remain a concern for the rupee, Venkataraman said.
 
On Thursday, crude oil futures rose to an all-time high of $57.60 per barrel on the New York Mercantile Exchange as supply worries persisted amid rising global demand.
 
"Despite assurances from the Opec to raise production, we are not seeing the desired level of easing in oil prices. This is because demand continues to persist and alternate sources of energy are not being tapped."
 
Speculative buying by hedge funds, which are not the natural users of oil, has added to the spurt in prices, he said.
 
"Until such time alternate energy resources are fully exploited by the global markets, a drastic fall in oil prices is not expected, though from the upbeat levels there could be a marginal dip."
 
"For a country like India, if we have to achieve a growth rate of 6.5-7 per cent. Demand from the manufacturing and industrial sectors will be more and thus there will be a rise in demand for oil," Venkataraman said.
 
"The progressive impact of oil prices is the only negative factor for the rupee, as it widens the trade deficit and adds to the inflationary pressure."
 
"A country with a higher growth rate and rising inflation, given the level of oil prices, cannot continue to have an appreciating rupee, unless there is sustained strong capital flows""which is expected," he added.
 
Raising of foreign direct investment limit coupled with opening up of the infrastructure sector will continue to attract good flows from overseas investors, Venkataraman said.
 
Any excessive volatility in the rupee, following the surge in demand for dollars from oil companies and other importers, is likely to come from the huge foreign exchange reserves, he said.
 
"In the event of a steep spike in oil prices and foreign investors withdrawing money or temporary stoppage of flows, we have adequate reserves to take care of the demand-supply mismatch."
 
As on March 19, India's foreign exchange reserves were at $140.4 billion, up $29.5 billion from a year ago.

 
 

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First Published: Mar 25 2005 | 12:00 AM IST

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