Re to trade in 43.20-44.60, RBI may prefer weak currency

Mumbai, Feb 25 | Updated: Feb 26 2005, 06:11am hrs
The rupee is expected to trade in the 43.20-44.60 band against the dollar during 2005 and the Reserve Bank of India (RBI) would prefer to weaken the Indian unit over time, according to ING Vysya Bank.

The private sector bank is also of the view that RBI is unlikely to follow the Feds rate hikes as inflationary pressures are easing and post-budget, a cut in cash reserve ratio is expected as a growth impetus measure.

The bank buttressed its view on its range for dollar-rupee by pointing to the April-December 2004 trade deficit at -$20 billion as against -$11.80 bn in the corresponding year-ago period and to the fact that the central banks intervention would offset any upward movement.

The cumulative fallout of widening trade deficit, global crude oil prices, business acquisitions overseas by India Inc, expected interest rate hikes by the Fed, diminishing threat of a revaluation of the Chinese Yuan, will be bearish for the rupee, said V Ravi Kumar, country head, ING Vysya Bank in a presentation late on Thursday evening.

On the real effective exchange rate (REER) basis, the Indian unit will be fairly valued if the REER is 100. The RBI defines the REER as the weighted average of nominal effective exchange rate (NEER) adjusted by the ratio of the domestic inflation rate to foreign inflation rates.

Mr Ravi Kumar felt that the RBI will continue to be guided by a +/-3% range around 100 and it will keep buying dollars till the REER is around 102.

The REER will continue to be a dominant tool as it effectively calibrates export growth while adjusting for inflationary impact of the exchange rate, he said.

Pre-budget, dollar-rupee is projected to head towards 43.50. However, RBI intervention will offset any upward movement. The past strengthening of the rupee vis-a-vis dollar will be thwarted, said Mr Ravi Kumar.

On interest rate markets, the ING Vysya Bank feels that the benchmark 10 year government security will encounter strong resistance at an yield of 6.25% between now and March-end 2005, with marginally stronger yield targets of 6.50-6.75% forecast for December-end 2005.

Referring to the push-down factor, it stated that the expected rise in fixed deposit rates is due to stronger credit growth and foreign exchange outflows.

The fallout of this situation is that other investors will flock towards greener fixed deposit pastures.