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Thursday, September 20, 2007

Robust Re reinforces rate revision rumblings

NEW DELHI: The rupee may continue its upward march for sometime to come even as the currency touched a nine-year high of Rs 39.875 to a dollar on Thursday.

Economists across the board concur that the exuberance of Indian equity markets and wider interest rate differential attracting a "deluge" of overseas funds, will mount pressure for an interest rate cut. The central bank, which also has to deal with the issue of overall forex reserves, may however, find this a tough call.

Some experts also opined that RBI may have to resort to a hike in cash reserve ratio. While exporters have been feeling the pinch , import-heavy industries, including petroleum and capital goods, have been seeing an upside.

The Customs collections may be a likely benificiary of the strengthening rupee. Economists say that the trend is expected to continue as it is triggered more on account of structural issues such as strong economic fundamentals rather than cyclical flows.

ICICI Bank chief economist Samiran Chakrabarty said: “The unhinging of rupee from 40.50 levels is more due to the Fed rate cuts and is not anything specific to rupee. Other currencies have been also impacted due to this generalised weakness of the dollar. So relative to a basket of currencies, the appreciation is not significant. Under such circumstances, willingness of RBI to intervene is limited.”

The rupee appreciation is benefiting foreign investment while domestic industry is at a disadvantage. A rate cut thus, becomes even more imperative. Says economist Surjit Bhalla: “The hardening of rupee is a cause for concern. Fundamentals do not justify this appreciation. RBI not justified in keeping the interest rates high. There should be a rate cut by at least 200 basis points,”

Experts feel that rupee may settle down to a level of Rs 40.20/40.30 end after the initial euphoria over the Fed rate cut subsides. Crisil has forecast the rupee to be Rs 40.5 to a dollar. “Intervention by RBI hasn’t been very significant.

In fact, intervention at this stage would have been futile in this time of temporary exuberance following the Fed rate cut. Situation will ease out after this knee jerk reaction to Fed rate cut. Fundamentals of Fed rate cut have been ignored. I think correction should come and rupee should settle at Rs 40.30/40.20 to a dollar level,” says HDFC Bank chief economist Abheek Barua.

Export-driven domestic industry such as textiles, IT, gems and jewellery already hit hard by appreciating rupee may bleed further. But, the government is confident of meeting the export target for the fiscal and has ruled out any downward revision. Exporters feeling the pinch have already upped their pitch for another package to mitigate the impact of rising rupee. Industry has called for a long-term strategy to tackle burgeoning forex reserves in place.

A hardened rupee augurs well for country’s import bill. The import bill especially on account of oil and capital goods imports could shrink marginally giving some relief to the government. Oil imports account for a third of country’s total imports. “Last month, when global oil prices shot up sharply, a strengthening domestic currency provided a cushion.

Without that, the government would have been under more pressure to raise the retail prices of petroleum products. Rupee and stock prices may find it difficult to sustain such sharp increase in the coming days,” said CRISIL principal economist D K Joshi .

Similarly, sectors depending on such imports may also cheer the northward movement of rupee. For companies which have raised money overseas and have begun their payouts, a higher rupee is a news they will celebrate as it would entails lowered outgo.

Echoing similar views, leading economist Saumitra Chaudhury feels it may be too early to draw any conclusion. "At present, the picture on forex front is very volatile and it may be too early to draw any conclusion. The situation globally is in a state of flux following the Fed rate cut with most currencies trying to adjust. Economic activity especially individual enterprise is sensitive to forex fluctuation and may get impacted. But, RBI will extend support", Mr Chaudhury said.

Arun Kaul, GM (treasury), Punjab National Bank, said, "The RBI stance would be dependant on the extent of flows and the kind of flows, the way trade is going to behave. If flows are large, we expect RBI to intervene.

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