With the rupee continuing its relentless rise as foreign capital seeks out higher interest rates and strong fundamentals in India, banks and money market players expect the Reserve Bank of India (RBI) to intervene frequently in the foreign exchange market. After staying away in recent times, the central bank has started intervening by buying dollars through public sector banks in last two days.
In 2010 so far, overseas investors have pumped in close to $23.18 billion into the Indian economy. On Friday, the Indian currency surged to its highest level since late August 2008, buoyed by record foreign portfolio investments and a shaky dollar. During the day, the rupee touched 43.95/96 against the dollar, its highest since August 29, 2008 and above its previous close of 44.11/12 on Thursday. The rupee closed the day at 44.09.
?We have seen public sector banks like State Bank of India (SBI) buying dollars for RBI. But the amount of intervention is small,?? said a senior official of HDFC Bank.
Dealers said that the central bank bought dollars to stem the rupee?s strength on Thursday and Friday as well.?There was some buying of dollars to curb rupee?s gain on Thursday and Friday,? said a dealer.
Capital inflows are expected to continue this month, with the forthcoming Rs 15,000-crore Coal India public issue expected to attract large portfolio investments. Experts believe RBI will continue to intervene in the days ahead as more portfolio investments enter the country.
Says Shubhada Rao, chief economist, Yes Bank: ?RBI intervention was not happening in recent times as current account deficit was widening. However, with the Coal India issue coming up, dollar inflows into the economy are expected to be high. We now believe that the RBI will act in small doses of intervention to keep the rupee movement under control.?
C Chandrasekhar, senior vice-president, Mecklai Financial said: ?The RBI may come up with some kind of cap on the capital flows like many other countries have done. The bank will encourage more inflows on the long term. We believe this kind of strong gain in the rupee is temporary. It may go back to 44.50 levels soon.?
Yes Bank’s Rao believes the rupee will touch 43 by the end of March.
Corporates, especially IT majors, have started feeling the heat from an appreciating rupee. V Balakrishnan, CFO, Infosys Technologies recently said that a stronger rupee will hurt the company?s operating margin by 1.5%. For the year, the margin may narrow by 130 basis points, he added.
Meanwhile, the country’s foreign-exchange reserves rose by $1.6 billion to $295.8 billion in the week ended October 8, the central bank said. While foreign currency assets rose by $1.6 billion to $268 billion, gold reserves remained unchanged at $20.5 billion in the week.
Experts believe that the impact of a stronger rupee will be seen in the next quarter since foreign inflows have been quite large in September and October. RBI governor D Subbarao said Friday that the bank was watching the exchange rate situation and will intervene in the forex market if inflows are lumpy and volatile.