Re seen breaching 44/$ soon

The rupee is seen gaining fresh ground against the dollar on continuing foreign exchange inflows and a weakening greenback globally.

It could breach the 44 per dollar-mark soon and hover higher around 43.20/25 in the next two months, analysts said.

Pawan Bajaj, chief dealer, forex, Bank of India, said, "All aspects of the Indian economy are favouring a stronger rupee, whereas the dollar is getting hit due to the huge US deficit."

Surendra Rosha, head of forex sales at HSBC, said, "The rupee may visit highs of 43.20/25 in January-March 2005 backed by strong inflows as India is a strong growth story."

Growth in real GDP at 7 per cent makes India the second fastest growing economy in the world after China.

European countries have shown growth rates of 1-2 per cent, while it is seen at 3-4 per cent in the US.

This makes the Asian markets a more favoured destination for foreign investors, said Mumbai money market dealers said.

Another trader said within Asia, India is rated among the best economies. "A modicum of stability in crude oil prices will further boost growth in India as inflationary trends would be checked," he said.

The market has discounted gradual recovery in the US economy, given the fact that the deficit weighs far too high to sustain a strong dollar.

What has, however, perturbed players is the restraint shown by Reserve Bank of India when it comes to sharp rises in the rupee.

In a week, the local currency has strengthened from 45.15 per dollar to 44.15.

Dealers said supporting a stronger rupee serves a dual purpose for the central bank. For one, it helps contain inflation by not releasing rupee liquidity (through the purchase of dollars to stem the rupee's rise).

Secondly, with the rupee strengthening against the dollar, it reduces the cost of imports, especially oil.

Further, arbitrage opportunities between the foreign exchange and corporate bonds markets has resulted in additional forex inflows, said dealers.

Foreign institutional investors (FIIs) are gaining 100-150 basis points advantage by investing in corporate bonds that are yielding 6 per cent.

Dollars are converted into rupees at a cost of around 4-4.5 per cent (inclusive of a six-month forward premium of 1.58 per cent, Libor at 2.60 per cent and withholding tax of 20 per cent).

Dealers said withholding tax is applicable whenever a FII has to invest in corporate papers.

The international markets have already discounted a stronger rupee in a one-year horizon, which has resulted in the non-deliverable forward market vis-a-vis the Indian forex market, another haven for arbitrage.