The Hindu : Impact of rupee appreciation

Online edition of India's National Newspaper
Sunday, Mar 28, 2004

Business

Business

Impact of rupee appreciation

By Oommen A. Ninan

MUMBAI, MARCH 27. The sudden upsurge in the value of the rupee in the closing stages of the current financial year took most market players by surprise. The rupee, in a week's time, has strengthened by around 1.6 per cent against the U.S. currency. It ended on Friday at 44.47, which is 63 paise stronger since March 19 closing of 45.16.

In fact on March 19, the Deputy Governor of the Reserve Bank of India, K. J. Udeshi said, foreign exchange reserves were not adequate when compared with China and other countries. India's foreign exchange reserves stand at around $110 billion. Answering a question on whether India's forex reserves were in plenty, Ms. Udeshi said, "There is no such thing as plenty as yet, but forex reserves are sufficient. India does not have forex reserves of the level that China has (at over $400 billion). We will have to define plenty.'' While the market was assuming that the central bank would be buying dollars to build up adequate forex reserves, the RBI loosened its grip on buying dollars and the rupee started appreciating suddenly from last Monday. Also, huge inflows from foreign institutional investors on account of public offering of public sector undertakings (PSUs) precipitated the appreciation of the rupee.

Further, last month, Indian corporates rushed to foreign markets for external commercial borrowings (ECBs). Part of this amount has also reached the country. This could add more power for the rupee to go stronger.

When the RBI Governor, Y. V. Reddy, last Thursday said, "There is target for the exchange rate, it is market-determined", market participants were sure that there would not be any immediate intervention from the central bank. In a highly volatile trading, the rupee strengthened by around 35 paise in intra-day trading on March 26 compared to the previous day's closing.

This has many impacts. Exporters who are uncovered were totally taken unawares and must have lost 1.5 per cent in this week's rupee appreciation. This also makes it clear that an exporter has to keep his receivables timely hedged, rather than wait for any opportunity to take profit in case of rupee depreciation.

Crude oil prices have gone up by $3-4 a barrel, since the last hike of petrol and diesel prices in India. The appreciation of the rupee could adjust part of the rise in crude oil. Otherwise, domestic petrol and diesel prices are bound to go up post-elections.

Incidentally, forward premiums are around half per cent annualised. The forwards are not so volatile as compared to the spot market. With two working days remaining this financial year, it would be interesting to see at what level the rupee opens in the new financial year. "If this trend continues and without RBI intervention, the rupee might break the 44-barrier before the country goes for voting'', K. N. Dye, Director, Basics Fore, a foreign exchange dealing firm.

Like Ms. Udeshi, Dr. Reddy too spoke in the same tune on an earlier occasion, "In order to maintain international confidence in the ability of the country's payment position, accumulation of reserves at a higher level is an important prerequisite".

This financial year the RBI has effected heavy purchases of dollars which created a huge money supply in the market. The money supply liquidity would be 14.5 per cent in this current financial year compared to the previous year. This could be one of the reasons that the RBI is not buying dollars till the end of the financial year.

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