In the course of the first seven and a half months of this fiscal, the rupee has been steady vis-a-vis the dollar. Although with respect to the trade weighted basket of foreign currencies it has depreciated somewhat, both in nominal and real (inflation adjusted) terms, due primarily to the recovery of the euro. Financial markets mostly maintain accounts in dollars, so on the capital account, even if not on the current account, it is the stability vis-a-vis the dollar that is material.

In the near term, the dollar is more likely to weaken, than gain, with respect to other major currencies. Thus, after a long time, there is a distinct possibility of the scenario changing from a regular 4 per cent year-on-year depreciation of the rupee against the dollar to more stable conditions. That, of course, makes current yields in Indian capital markets more attractive by 400 basis points annualised.

In early September, this column had suggested that of the $3.7 billion increase in foreign currency (forex) assets with the Reserve Bank of India (RBI) in the April-June quarter of 2002-03, valuation increases due to appreciation of non-dollar assets was $1.5bn- $2 bn. The real increase was the balance of $1.6bn-$2.1bn. The balance of payments (BoP) for the first quarter bears that out, since the BoP surplus was $1.67 bn.

Extending the same logic and with greater conviction to the second quarter (July-September), the estimate is a small loss on valuation. Thus, while the nominal increase in forex assets was $5 bn, the real increase was likely to have been $200 million more. Then, in October, forex assets increased by another $1.6 bn. Where arises this abundance, and what does it bode for the near term?

The merchandise trade deficit in the second quarter of this fiscal at $2.5 bn was roughly unchanged from last year, and much bigger than that in the first quarter of the present fiscal. The current account was, however, clearly in surplus in the second quarter of this year, and possibly double that of the $325 mn in the first quarter. Software and other service exports as well as remittances have undoubtedly done better. That would also mean that against the current account deficit of $2.9 bn in the April-September period of 2001-02, this year?s first half surplus of some $1 bn has made an aggregate difference of as much as $4 bn. On the capital account, non resident Indian (NRI) deposits had fallen by $1.2 bn during April-August 2001, while during the first five months of 2002-03, they rose by $1.4 bn ? a gross difference of $2.6 bn.

Offsetting these two factors has been the decline in foreign investment flows this year. Foreign direct investment (FDI) inflows were sharply lower in August 2002, compared to last August. Consequently, for the April-August period we have a 7 per cent decline this year. Portfolio inflows have, of course, been negative through this fiscal, while they were swelling last year.

Overall foreign investment inflows in the first five months of 2002-03 at $1.1 bn were less by $1.7 bn from the same period last year. The cumulative impact of these three items over the course of the first half was thus perhaps about $5 bn on the demand and supply of foreign currency, compared to last year.

The RBI purchases (net) of foreign currency from the market over the first half of 2001-02 had been a mere $3 mn. This year, over the first half, the net purchases of the RBI were $4.8 bn ? a gross difference of $4.8 bn. Which number sits well with the $5 bn impact computed earlier ? a bit too well perhaps.

What are the lessons in this? For one, that the forex market is shallow. That if the RBI had not made large purchases, the rupee would have shot up. That, in the near-term the current account looks more than sufficiently self-financing (courtesy of large current transfers by expatriate Indians), and the rupee has a distinctly upward bias, rather than any weakness. Which, perverse as these things are, makes the investment outlook, in the admittedly limited focus of external conditions, much improved.

The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)