Re at 41.85, inflation may come down

MUMBAI: A globally-distressed dollar is turning out to be good news for Indians. With the dollar coming under pressure against most major currencies, the rupee has surged to close at a nine-year high of 41.85/86 against the dollar, up from Friday’s 42.51.

The global weakness of the dollar, coupled with the resumed inflows from foreign institutional investors (FIIs) and the tightening of domestic rates will ensure that traders buy the rupee, while the dollar is sold. A stronger rupee would ease inflation, as it brings down the cost of imports — particularly of crude oil. Indians will also not feel the global rise in gold prices as most of the increase will be offset by a cheaper dollar. For individuals, a weaker dollar means cheaper foreign holidays and the possibility of a fall in prices of imported electronics.

IT majors like TCS have been bracing for a weakening dollar. TCS on Monday announced that it has obtained a $1-billion hedge at a price range of 43.5-44.00. However, small exporters who do not have opportunity to hedge will be worst hit.

Clothing Manufacturers’ Association of India president Premal Udani said: “It’s already come to a stage where I might have to close down my factories. I have to quote 10% higher price and no one will be willing to buy at that price.” He reckons that many textile manufacturers are already exporting at a loss, because textile exporters work at margins lower than 10% and buyers aren’t willing to trade downwards from last year’s prices. The biggest exporters in the four sectors normally wouldn’t cover more than 50% of their foreign currency exposure. The textile industry foresees a drop of 20% in export targets for the fiscal ending March 2008, down to $10 billion from an expected $12 billion.

A currency appreciation of 10% will be hard to overcome, even as exporters managed to override the appreciation over the last year. “Over the past year, industries were able to cope with appreciation as well as a reduction in peak import duty to 7.5% due to increased productivity,” says Ajit Ranade, chief economist, Aditya Birla Group.

Traders felt that there is a strong likelihood that the central bank could be deriving comfort from the dollar weakening in offshore markets. Unless the RBI starts intervening aggressively in the forex market, the rupee is likely to continue strengthening against the dollar. As recently as July 2006, the rupee had touched a low of 47 against the dollar.

Sundeep Bhandari, regional head-global markets, South Asia, Standard Chartered Bank said: “The absence of sustained intervention from the Reserve Bank of India in the past few weeks has provided the market with the much-needed direction. The dollar will remain weaker in the near-term, while the UK pound and the euro are expected to start weakening against the greenback only in the medium term.”

Treasury managers are betting on a weaker greenback, at least for the short term and feel that given the current set of circumstances, the emerging prognosis is that it will be feasible to exit dollar positions.

Says a treasury manager with a private sector bank: “The US is currently caught in a situation where an economic slowdown is already being reflected in automobile sales and the housing sector. Also, given that elections are around the corner, any major shift in policy stance is unlikely.”

Ajay Mahajan, president, financial markets & institutions, Yes Bank: “The fact that the euro call is trading at a premium against the dollar put itself hints that the market is bracing for a weaker dollar. While the European Central Bank is expected to hike rates, the US rates are expected to taper off.

However, the dollar continues to have a strong interest rate advantage over the Japanese yen, as Japanese rates are very low, compared to those in the US.”

Within Asia, the rupee and the Chinese yuan are expected to outperform, while others such as the Singapore dollar, the Taiwan dollar and the Korean won may not be doing so as they are not dealing with large forex inflows.