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Rupee On A High

The Indian rupee has hit a six-month high against a weakening dollar. A blip in the chart?

Rupee: Down And Up

So, so much for the "50-to-a-dollar" brigade. The year has just its last quarter to go, and the rupee is trading at Rs 48.21 to a dollar. This, in fact, is a six-month high. The next time you're tempted to predict the 'inevitable', think again.

Strange things do happen. Except that in this case, there's nothing very strange about the forex market's behaviour. What's strange, perhaps, is how long it took for the rupee to start hardening against the dollar.

Most currencies worldwide have been gaining against the dollar all the way since the start of the year, or at least since April, when it first became clear that the dollar would weaken significantly - reversing a long trend that had an almost unbroken record through the 1990s.

The primary analysis, thus, must concern the dollar rather than the rupee.

What's doing it? First of all, America's gaping current account deficit of $423 billion- nearly 4 per cent of the GDP - is losing sustainability. This is acting in concert with a slowing US economy (as you read this, the chance of a 'double-dip' recession is growing), the stock market mayhem and consequent erosion in consumer confidence, to weaken demand for the dollar.

Now that American assets are no longer the most sought-after, as far as global investors are concerned, investor money is no longer rushing into the US (the euro zone has spotted opportunity as an alternative), making the deficit even more untenable, and the dollar weaker. Which, in turn, makes dollar-denominated assets look even less attractive.

The US is not the hottest investment bet anymore. That's the long and short of it.

But what does a rising rupee mean for India? First, it means that importers get relief. India's ballooning oil import bill (Rs 68,000 crore for 2001-02), could perhaps come down a bit. Or at least not rise too much (quantity offtake has risen, according to one source), unless, of course, there's a global oil-shock later in the year.

More good news: a stronger rupee also gives Indian corporates the confidence to take on dollar debt (the Asian crisis frightened most companies off).

As for exporters, they need to sharpen their value propositions to combat the drop in price competitiveness (minor, no doubt). Domestically, a strong rupee can be seen as good news. Says a Mumbai-based investment banker: "A strong rupee indicates a strong and growing economy, which in turns means higher return on investments. So there are greater chances of investments in the country.''

That could attract greater FDI, if not portfolio investment (these guys fled in March). The year 2001-02 saw India notch up FDI inflow of a good $4.6 billion. This year could better the figure.

At the end, the question is whether the rupee appreciation is sustainable, or just a flash in the pan. Well, let's put it this way. The weak dollar looks like staying awhile. But, be warned, that doesn't guarantee a strong rupee.

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