MUMBAI, Aug 20: The recent surge in the dollar based on a newspaper report that the authorities will prescribe a band in which the rupee will move against the dollar has now has sparked off a debate among bankers as what the ideal band should be.

According to J Moses Harding, head of forex, at IndusInd Bank the rupee should ideally move between 35.60 and 37.50 to a dollar.

"This band will reflect the true interest rate differentials prevalent in the economy", Moses said.

The Tarapore Committee report on Capital Account Convertiblity had stated that the RBI should have a monitoring exchange rate band of five per cent around the neutral real effective exchange rate. "The RBI should ordinarily intervene as and when the REER is outside the band", the report had stated.According to a dealer at a foreign-owned bank the rupee should move in a band of 35.80-36.20 per dollar.

"It is difficult to ascertain the level but rupee is currently overvalued and will need correction", he added. NS Paramasivam, senior vice president (forex) Essar Group said that the rupee will gradually weaken to Rs 37.10/37.20 levels.

"This will reflect the neutral exchange rate of rupee in comparison with the dollar", he said.

PV Maiyya, chairman of ICICI Bank refused to lay down a band for rupee. "It is difficult to state a band before the petroleum price hike comes about", Maiyya said.

According to Subodh Shah, executive director of the Credit Rating and Information Services of India Ltd fixing of a band will not work. "Look at what happened in the South East Asian market where bands were fixed.

Let the market decide the exchange rate. But the trade balance should be taken into account before a band is fixed", Shah said.

Jamal Mecklai, of Mecklai & Mecklai has advised its clients not to go for any kind of large forex exposures on the basis of its today's development, said a dealer in Jamal Mecklai.

Though volatility in coming days will be more frequent now there is no reason to panic, he said. It would be difficult to put a band in which the rupee will move even though the RBI officials have estimated a 14 per cent overvaluation in terms real effective exchange rate (REER). ``We think the Reserve Bank will opt for correction of the overvalued rupee over a period of time which may extend beyond three years,'' he said.

However, the present volatility will force the corporates to opt for short- term cover for their external commercial borrowing programme and borrowing in FCNR (B) category which will push up the forward premia modestly in coming days.

The corporates were not going for a cover earlier as the rupee was stable and all the more the forward premia would have neutralised the interest rate differentials between forex loans linked to London interbank offered rate (Libor) and the domestic rates.

The financial institutions will be more prudent now while lending the forex resources to corporates. `` We assess the company's cash flow in terms forex and rupee resources before lending forex resources and accordingly advise them whether to go for a cover or not,'' Kalpana Morporia, General Manager, Industrial Credit & Investment Corporation of India adding that we will continue to do that.

It would be difficult to put any band for the rupee movement, she said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.