The greenback will be under pressure

Written by Sunny Verma | Updated: Dec 31 2007, 04:38am hrs
If the present is any indication of the near future, then the rupee will continue to rise. That appears to be the dominant view being echoed by experts and also, in an unofficial tone, by government officials.

A majority of analysts say the rupee will continue to appreciate against the dollar. Some of them do not see any problem in the rupee touching even 35 to a dollar by 2008-end.

But then, there is also a strong minority view, being put forth with a great degree of erudition, that the rupee would depreciate against the dollar by the year-end. The Indian rupee has appreciated the most in the last one year, at about 12%, after the Canadian dollar (22%) and the Thai baht (13-14%), on the back of strong capital inflows.

Some of the funds that have flowed into India have chased the countrys growth story and the booming equities market. Others have come to diversify portfolio risks, the need for which has indeed ballooned after recent troubles in developed financial markets. With foreign funds pouring in, the Rupee is expected to firm up further this year.

The current trend is that, inflows exceed outflows by a wide margin. And if this trend continues, then I wont be surprised if the Indian unit appreciates to Rs 35, says Rajesh Chakrabarti, assistant professor, (finance), Indian School of Business.

The net capital inflows almost doubled to $45 billion in 2006-07 compared with $23.4 billion in the previous year. We are prepared for the rupee to reach Rs 35. That should logically be the trigger point for further sops to exporters, says a finance ministry official, requesting anonymity.

Although the appreciating currency may symoblise a straightening economy, it also creates a class of winners and losers. The losers in this case are exporters, and if one peels another layer the workers in the export sector.

Textiles, IT and some other sectors have been hit hard by the rising rupee, which has eroded their competitiveness. In the April-July period of 2007, exports of more than half 11 of the 17 principal commodity groups declined in rupee terms, while another two groups grew by less than 5%.

Indeed, there have also been cases of employee lay-offs in some sectors. The commerce and industry minister fears, as do many others, that exporters may cut two million jobs. This implication of the rising rupee could be fearsome and dangerous as well in a democratic polity.

It has, to an extent, already unsettled the political economy, and the government and the regulators have tried hard to combat it.

The Reserve Bank of India has tried its best to contain currency appreciation and simultaneously to keep inflation under check.

While it has used sterlisation bonds for this purpose, it has also let the rupee rise at times. At the same time, the central bank has substantially increased the possibility of capital outflows both for individuals and companies.

The government, too, has tried to moderate capital inflows by banning fresh issuance of participatory notes (an indirect way by which foreigners can invest in the Indian equities market) and by restricting the possibility of external borrowings.

But experts are of the view that the central bank may be running out of policy options to further contain the rupee. At the moment, it looks that the government and the regulators have exhausted their options to intervene in the currency market, says Chakrabarti. This would mean that the rupee would continue to increase at good speed if inflows keep coming in .

G Ramachandran, head, Global Research Group at ICICI Bank Ltd, has a comprehensive take on the issue. We expect the US economy to grow at 2% a year. If this growth rate slows down, then markets in Japan, Europe and China would witness a slowdown. In this case, ones exchange rate forecasting goes for a toss, and their could also be turmoil in the currency markets. This is the worst-case scenario.

In the best-case scenario, he says, the rupee would depreciate from its current level to Rs 40-41 and inflows would remain buoyant.

In the neutral scenario, the exchange rates would remain intact, with the rupee ranging between 38 and 38.5 to a dollar. This would be possible if the US growth rate is orderly and the Fed goes in for a concerted plan with other global financial regulators.

He sums up the scenario rather confidently: The Indian currency is likely to remain stable, and pushes the 35-to-a-dollar proposition to the realm of impossibility.

Abheek Barua, chief economist at the HDFC Bank Ltd, goes a step further. We expect the rupee to depreciate by 2008-end.

Profitability is expected to slowdown in the first half of 2008, which, along with the credit squeeze that is developing in the global markets, would dampen the capital flows into the Indian economy.

By now, the rupee has stopped appreciating. And if one expands it further, one can see currency depreciation on the way.

But then, Barua also adds, The dominant view is of continued appreciation of the rupee.