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Rise And Rise Of The Rupee

The gains in the rupee never seem to end. Will they? It's hard to tell.

By Ashish Gupta

$ blues: For how long?

There's just one way traffic, it seems, on the Rupee street. A slow and steady strengthening against the dollar. A trend that started late last year, and has held good for all of this year, so far.

The question is: will it continue?

The likelihood is high, going by the expertspeak emanating from Mumbai, home to India's savviest currency analysts and traders. Unless there's a shift in the world's macro-economic picture, expect the trend to continue.

Jamal Mecklai, CEO, Mecklai Financial, thinks it could even be Rs 44 to a dollar somewhere in 2004, and Rs 45 to a dollar in 2005. Other analysts, such as A.V. Rajwade, are markedly less bullish on the rupee, but by and large, Indian currency-watchers are veering towards a consensus that the rupee is going to gain steadily over the months ahead. It's no secret that currency traders are short on the dollar.

The reasons are well known. The dollar may have momentarily stemmed its decline against the euro, but there is no reason to expect the American greenback to rally anytime soon. US interest rates are unlikely to go up in the absence of a strong rebound in its economy. Net net, the dollar has entered a phase of global weakness. Meanwhile, Indian exports are growing, forex reserves have scaled $77 billion, and the trade deficit ($7 billion last year) is unlikely to go up by any significant degree (in any case, the current account, which includes service exports, has gone into surplus). "All this clearly plays in favour of the rupee, and it means that NRIs will continue to bring money in and corporates will be selling forward," says Mecklai.

What's more, adds Mecklai, there's a new game in town as well---FIIs have started investing in Indian debt. While the figure for January 2003 was just $15 million, the average for March and April has been in the region of $150 million. "This is a huge window of opportunity and the total FII investment in the debt market could even go up to as much as $3 billion during the course of the year," says Mecklai.

That seems rather a high figure, but even a fraction of it would serve to strengthen the rupee further. The RBI, for its part, is against any volatility in the forex market, and is trying to keep the rupee from appreciating too sharply. Yet, the RBI is keen to attract foreign investment in Indian debt instruments. And that, as we all know, translates to even more demand for rupees. If there's a change in the outlook, we will let you know.

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