MUMBAI, Aug 20: Foreign funds feel that the rupee may not regain the last one year's steady band of Rs 35.70-35.85 after Wednesday's volatile movements against the dollar. The slide saw the rupee hit an 18-month low of Rs 36.14 against the greenback.

The FIIs see the rupee losing ground steadily over the next few months and expect an average depreciation of 5 per cent from current by the end of 1997. A concerted effort from the government's side to bring down the rupee may also cause a temporary halt to foreign portfolio investment, some fund managers feel.

This assessment is based on an overall expectation of imports picking up by the beginning of the third quarter of this fiscal, while exports are expected to stay slack, thus widening the trade gap. This, added with the coming action on the oil pool deficit, will add further momentum to the depreciation of rupee in the long term. The fact that the rupee, after rebounding from above Rs 36, continued to hover at Rs 35.9 for the rest of the day is an indication that it has broken out of the previous narrow band, they feel.

"I think the rupee is overvalued and it should slip further over the next three months. We expect the rupee to depreciate 5.5 per cent by March, 1998. Even in the shorter term, it may go down," said Rajan Govil, economist, HSBC Investment Banking.

DSP Merril Lynch chief economist Kamal Sen said he expects 4-5 per cent depreciation in the rupee by the beginning of 1998. His assumption is based on the expected spurt in imports in the third quarter. "This is the key factor," he said.

Sandeep Nanda, NatWest Securities' head of research, agrees. He expects the rupee to depreciate by 3-5 per cent by early 1998 due to a sharp pickup in imports by then. He expects growth in exports to be limited, further widening the trade gap. "Our fundamental thesis is that the rupee is 10 per cent overvalued on a trade basis," says Nanda. However, the uncertain factor is capital inflows.

The FIIs, however, feel that the rupee may not see a steep and sudden fall because of the strong reserves position. "In the short term, the exchange rate will be determined by the reserve position and in the long term it will be determined by the balance of payments situation.

I think the government wants to bring down the rupee, which will scare away the FIIs in the short term. They would want to sell off and be out before the depreciation," said Anand Jhaveri of Birla Marlin Securities.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.