With capital flows into India expected to remain strong in the wake of abundant liquidity worldwide and the US Federal Reserve?s move to buy bonds worth $600 billion, the rupee, say experts, can only head north. Of course, the Indian currency isn?t expected to strengthen beyond a point, say Rs 43.50 against the dollar, because it would begin to hurt exports and prompt the Reserve Bank of India (RBI) to step in. The rupee has risen by almost 5% against the dollar this year.
Hemant Mishr, MD& head, global markets, South Asia at Standard Chartered Bank points out that even after netting out the lumpy flows for the Coal India issue, there is still a ?wall of cash? waiting to flow into the Indian economy. ?We expect the rupee to trade in the range of 43.75-45.25 against the greenback,? says Mishr.
Observes Mohan Shenoy, head, treasury, Kotak Mahindra Bank: ?Since QE-II was announced, the dollar has been weak against he euro. Although we believe flows into India will be strong, we don?t think the rupee will appreciate much against the greenback, though it will strengthen.?
Shenoy expects the rupee to trade in the range of 43.50-45.50 in the next few months. Corporates, especially IT majors, have started feeling the heat of 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. Experts believe that the impact of a stronger rupee will be seen in the next quarter since foreign inflows were quite large in September and October. They also say that any major strengthening might force the RBI to intervene.
During the second quarter monetary policy review, RBI governor D Subbarao had clearly said that the central bank was watching the exchange rate situation and would intervene in the forex market if inflows are lumpy and volatile.
?We will take action as warranted with a view to mitigating any potentially disruptive effects of lumpy and volatile capital flows and sharp movements in domestic liquidity conditions, consistent with the broad objectives of price and output stability,? he noted.
Kotak?s Shenoy believes that the central bank may sterilise capital inflows if they are heavy.
Observes Sameer Narang, economist, HDFC Securities: ?Given our huge merchandise deficit, India may not want to impose capital controls. Our deficit has already hit $ 63.5 billion between April and September 2010. However, we believe that unabated capital inflows might lead to some action from the RBI.?
It?s been a volatile year for the Indian currency. At the start of the year, the rupee was trading at Rs 46.32 and by mid-April, it had strengthened to Rs 44.40. Just when everyone was beginning to feel it would touch 43-43.50, it started weakening once again. By mid-May, the rupee had dropped back to Rs 47.70 and in one single day on 25 May, was cheaper by almost a whole rupee. It then recovered to Rs 46.17, having lost nearly 4.3% in a single month in May. However, it later began to weaken following the uncertain economic outlook for major developed countries and turned up only after mid-September. After the Coal India issue, the rupee has once again started gaining momentum. So far, foreign investors have pumped $26.1 billion into Indian stocks this year and a record $9 billion into bonds.