Rising Re could widen trade deficit
This also implies that importers will face the heat if they keep their positions uncovered till the year end.
By Preeti R Iyer, TNN |
Treasury managers and economists are betting on the rupee sliding back to its 43 levels against the US dollar by the end of this calendar year. A gaining rupee in the shorter term only hints at a weaker currency over the medium term, they argue.
Going forward, a stronger rupee definitely spells losses for exporters who earn revenues denominated in other currencies. Thus, it could widen the trade deficit by the year end. Now, what this could also imply is that importers, who have been benefitting through a rising local currency, will then be caught unawares, if they keep their positions uncovered till the year end.
Standard Chartered Bank and ABN Amro forecast that by the end of this calendar year, the rupee would depreciate to around 43 levels against the dollar.
Sundeep Bhandari, regional head-global markets, South Asia, Standard Chartered Bank said, “The rupee will remain extremely volatile over the next few weeks. The Reserve Bank of India’s absence from the forex market is helping the local currency gain some direction. But, by December 2007, it is likely to weaken to 43 levels.”
Given that RBI has maintained inflation-targeting as its primary goal, it has been keeping away from intervening in the foreign exchange market for the past one month. Now, the result of such an action has translated in the rupee rising by almost 150 paise within a month’s time. On Tuesday, the rupee gained further from Monday’s levels, rising to 41.64 levels during the day. However, it ended the day at 41.97.
Tuesday’s correction is viewed as an outcome of investors squaring off short-dollar positions on fears that the central bank would intervene heavily to stem the rupee’s rally. The rupee has gained 12% from a three-year low of 47.04 in July, including more than 6% in 2007, to be Asia’s strongest currency against the dollar this year.
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Ajay Mahajan, YES Bank’s president, financial markets and institutions said that 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 the issue of large forex inflows.
ABN Amro, in its fortnightly report on the forex market, has reported that the current round of monetary tightening by the central bank would be positive for the rupee because higher lending rates in the short term, coupled with another round of impounding of bank funds, will help the rupee gain value.
ABN Amro’s chief economist, Abheek Barua, feels, “Some amount of momentum is still left for the rupee in the short term, which means that the local currency could breach the 41.50-mark, too. But, there are conditions of tightening liquidity, which spells selective central bank intervention, taking the rupee to retract to its 43.20-43.50 levels by June-end. By December 2007, the rupee is likely to stabilise around 43 levels versus the greenback.”
However, the report has also forecast that three factors, which might pull the rupee downwards, could be intervention from the central bank, hardening crude oil prices and a weakness in the equity markets.
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