Rupee gains after ECB relaxation

Written by Banking Bureau | Mumbai, New Delhi, May 30 | Updated: May 31 2008, 05:58am hrs
The rupee touched a two-week high against the dollar on Friday, reversing five weeks of losses, as the government a day earlier eased rules for external commercial borrowings (ECB) that would encourage more capital inflows.

Finance minister P Chidambaram said the August 2007 curbs on ECBs were meant to be temporary and that the government removed some of these curbs on Thursday as the capital inflow situation had eased. He said these restrictions would be further relaxed over time.

Taking a cue from the FMs statement and the slew of measures announced on Thursday liberalising ECB norms, the Indian currency ended at 42.46/47 against the greenback on Friday.

Given a widening current account deficit, the changes announced on Thursday were long overdue and are positive for liquidity/capital flows, economists said.

This would also provide some relief for the depreciating rupee. However, the point to note is that liberalised norms for higher rupee expenditure are only via the approval route, said Rohini Malkani, an economist with Citigroup India.

However, the yield on the benchmark 8.24% note due April 2018 rose 5 basis points to 8.10% this week, and the price fell to Rs 100.94. Analysts believe the bond market sentiment is going to remain weak because inflation hasnt yet been contained, and the relaxation in ECB rules may not help the rupee in the long term.

RVS Shridhar, chief dealer with Axis Bank, said, We feel bond yields (ten-year benchmark paper) will touch 8.20% by the end of June if things get worse or drop to 7.90% if there is some positive news. However, they will not go below 7.90%. Talking about the rupee, he added, We think they too will remain under pressure as a result of high crude prices and muted FII inflows. In the short term, the rupee will be range-bound at 42.20-43.20.

Tapan K Bhaumik, chief economist at Reliance Industries Ltd, said, Liquidity also is an issue as money supply is very high. RBI may make use of more MSS auctions than tamper with interest rates, as hiking interest rates in such a scenario would damage the economy.

However, Robert Prior-Wandesforde, an economist with HSBC, said: Higher inflation at 8.1% also increases the chances that RBI will respond and respond more quickly and aggressively than we had anticipatedpossibly as early as tonight.