Rupee firm on weak dollar, likely to breach 47.40 by end-September

Our Banking Bureau

Mumbai, Aug 21: THE downward revision of rating on India’s long-term local currency by international rating agencies notwithstanding, the rupee, which has been stable over the last month, continues to remain firm against the dollar. The forward premia curve also remained unchanged over the period.

The ongoing dollar sell-off has significantly relieved the pressure on the rupee and it remained virtually unmoved in nominal terms over a period of months. Noted JP Morgan Securities India Pvt Ltd in its latest market report: "A significant contribution to the rupee’s stability is the dollar’s recent weak performance against the other major currencies". The last 18 months saw the rupee’s transition from an undervalued currency to an overvalued one, primarily because of dollar’s strength. However, with the dollar losing its ground, this trend is seen reversing. Over the last month, the dollar has lost around 6.9 per cent against the euro. It also lost 4.5 per cent against the yen and 2.8 per cent against the pound-sterling. As a result, the extent of the rupee’s overvaluation has dropped to one per cent from 4.1 per cent. In other words, the rupee has depreciated sharply against the dollar in real terms.

The rising foreign exchange (forex) reserves of the country also gives the nominal rupee some underlying support. As on August 10, the forex reserves stood at $44.135 billion, according to the Reserve Bank of India (RBI)’s latest Weekly Statistical Supplement. Foreign direct investments are also maintaining its last year’s trend and foreign institutional investors continue to bring in dollar funds, albeit at a steadily slowing pace.

Keeping these in mind, it is expected the rupee to depreciate marginally over the short run. "Accordingly, we tweak our September-end forecast for the rupee against the dollar to 47.40," said JP Morgan.

The report also added that there is no expectation that the current dollar sell-off to continue for long, the dollar is unlikely to rebound in the current quarter, except against the yen. Thus, pressure on the rupee on this count will remain subdued.

The rupee held rangebound against the dollar on Monday, the last trading day, and closed at 47.1275/1325. "Scattered dollar demand from state-owned banks exerted mild pressure on the rupee," a dealer with a forex dealership said, adding that adequate local dollar supplies absorbed the limited buying interest.