Rupee strongest in 9 years

The rupee today surged past the 42 mark against the dollar on continuing foreign inflows and sale of foreign currency holding by some exporters. The rupee rose 1.4 per cent to close at Rs 41.90 per dollar, its highest in nine years.

The rupee has appreciated 3.6 per cent this month, which erodes profits of Indian companies with large export revenues. Every 1 per cent rise in the rupee causes 25-50 basis points dent in the profit margins of exporters.

Dealers said the rupee's rally could be partly owing to the central bank's absence from the foreign exchange market in recent weeks as it focuses on fighting inflation.

The Reserve Bank of India (RBI) has been staying away from purchasing foreign currency as it would ease liquidity in the system, which leads to higher money supply and, in turn, higher inflation.

The rupee is expected to appreciate to around 41.70 per dollar, before ending the week at around 42.40, amid expectations that the RBI would intervene to prevent a further rise.

Deposits by non-resident Indians increased by $4 billion in 2006-07, while foreign borrowings by companies rose 29 per cent to $28.71 billion.

Foreign institutional investors have bought more than $1.5 billion worth of shares thus far in 2007 compared with $8 billion in 2006.

The country's foreign exchange reserves rose above $200 billion for the first time in early April, reflecting strong capital flows and central bank intervention.

The "rupee appreciation is because of the large inflow of capital,'' Finance Minister P Chidambaram said on Sunday. "The rupee is still very competitive relative to other currencies,'' he said.

Growth in shipments abroad slowed to less than 10 per cent for the third straight month through February, raising concerns that the trade deficit will widen even as crude oil prices rise.

Bloomberg adds: "Sentiment is in favor of the rupee because of the strong capital flows,'' said Rohan Lasrado, a currency trader at HDFC Bank in Mumbai.

"Some exporters, who earlier waited for the rupee to decline, may have now been prompted to sell dollars. The rupee climbed 1.1 per cent to 42.165 against the dollar as of 2:09 p.m. in Mumbai, according to data compiled by Bloomberg. It reached 42.0325, the highest since June 1998. India is luring global funds to its stock market and overseas companies are setting up factories. Asia's fourth-biggest economy probably expanded 9.2 per cent in the fiscal year that ended March 31, the fastest in almost two decades, according to the government's forecast.