Policy reaction, if any, will be transitory
The rupee is unlikely to react to the Reserve Bank of Indias credit policy and may continue to trade in a band of 48.34-48.45 against the dollar. Even if there is a reaction to the policy statement, it is likely to be of a short-term nature.
Dealers are expecting a forward looking policy from the Reserve Bank of India, with a clutch of deregulation measures. However, this has been an on-going process.
Even though there is no formal announcement on making the currency full float, the central bank is inching towards it by gradually deregulating foreign exchange norms over the years.
The credit policy could include some indication on the opening up of the derivatives market by paving the path for rupee options and committing on STRIPS markets and futures exchange for interest rates. It many have also include some measures on the exports front.
On the REER basis, the rupee is still undervalued and there is a scope for appreciation. Dealers say that in case there is positive news, the rupee is likely to appreciate by around three paise versus the greenback. However, this is likely to be only a temporary effect compared with the other markets.
The RBI seems to be comfortable at the current level and does not want the Indian unit to be stronger against the dollar. With the rupee not fully convertible, spike in inflows are not portended.
The trend in rupee will depend on dollar inflows and outflows. The last few weeks have seen substantial demand for dollars from oil companies. These are traditionally bunched up, as there are higher imports both before the beginning of the monsoon and also at the end of it.
This week could also see some month-end demand for greenbacks seeping in. However, dealers dont foresee substantial change as the RBI has been keeping a tab on the trend line : it has been selling dollars when supply tapers, and sucking out greenbacks in the case of a deluge.
Dealers do not presage a rear-up in dollar supplies but instead see the trickle of foreign direct investments and remittances continuing. However, as was seen in the last few weeks, foreign institutional investors are still staying out and are not likely to rush in soon.
Forwards
The mid-term credit policy will have a bearing on forward premiums. If there is a 25 basis point repo rate cut, premiums are likely to fall by around 10 to 15 basis points. And in case the cut is of 50 basis points, premiums could droop by around 20 basis points.
And if there is no rate cut there could be some knee-jerk reaction and premiums could cross the 6 per cent mark again. But this is expected to come down owing to the funds-flush situation.
