Rupee steps into volatility zone again

Mumbai, Jan 5 | Updated: Jan 6 2006, 05:58am hrs
The rupee which has appreciated by 40 paise in the last four days, has entered into a volatility zone once again, since the start of the calendar year. Reacting to Thursdays close of 44.70/71, the market players expect this volatility to continue till the announcement of Budget 2006-07.

However, pegging the rupee appreciation at 44.25 in couple of months they are skeptical about taking a long-term view. The domestic currency which had depreciated to 46.32/33 exactly a month back has managed to appreciate over Rs 1.60 due to the robust foreign inflows in the local stock market.

According to market analysts the players are expecting $1.8 billion to enter stock markets from a fund floated in Japan by one of the largest fund houses. It is also anticipated a similar fund is to be launched in US which would chanalise a sum of $2.5 billion to $3 billion towards the Indian stock market.

Too much of the dollar is flowing in to Indian markets. Exporters have started selling forwards expecting, the rupee to strengthen further. A strong resistance is seen at 44.25/30 levels, said K Harihar, head treasury, Development Credit Bank (DCB).

The fact remains that the rupee is overvalued by the new effective exchange rate calculated on the basis of REER (taking into new basket of currencies).

International investment banker, JP Morgan in its December 15 report had said that the rupee is overvalued by around 7% to its theoretical fair value in 1993-94. By December 15, it had weakened by almost 7% in the period from August 2005 onwards. Despite the robust inflows from foreign institutional investors (FIIs), traders are in a dilemma over the movement in wake of spiralling oil prices and the widening trade deficit.