Outlook : Currency

Border situation to decide rupee path

The overhang of border tensions will determine the course of the rupee this week. If the situation remains normal, the currency is likely to test the psychological mark of 48.50 per dollar, but may not be able to breach it. Through the week, it is seen in a band of 48.50-48.56.

If the tension on the border escalates, the rupee will move down to around 48.70. According to dealers, the undertone in the forex market is still bullish. Last Friday, the currency went down to 48.56 after reports of border skirmishes, but firmed up later to close at 48.54/55.

Dealers said corporates and non-resident Indians (NRIs) are still looking at bringing their greenbacks into the country. They added that this trend will not change because of the tension along the country's border.

Inflows worth about $500 million are expected this week. Some of the major corporates have been selling greenbacks for the last few weeks and this is likely to continue. There could also be some foreign direct investment (FDI) inflows into the telecom sector apart from remittances from NRIs and foreign institutional investors (FIIs).

Dealers said the Reserve Bank of India (RBI) is unlikely to allow the currency to go beyond 48.50. There is a feeling that the 48.50 mark is a psychological level, and if the rupee breaks this, then the only way is up.

The hardening of the rupee could also be seen from the spate of import cancellations in the market. There could be some dollar buying by public sector units due to the end-of-the-month needs for imports. However, there could be some caution due to the border tensions.

... forward rates will follow the spot

Forward premiums will follow the spot rupee. If nothing untoward happens on the border, the six-month forward premium is likely to cross the 4 per cent mark.

There is ample liquidity in the money market and little credit-offtake. This will reflect in the soft call money rates and therefore in the forwards too.

Exporters are selling their forward dollars due to the strengthening of the rupee, while importers are avoiding to commit themselves at current levels.

The six-month forward premium could move in a range of 3.95 per cent to 4.25 per cent, while the one-year forward premium may swing between 4.10 per cent and 4.35 per cent.

However, in the event of any border tensions, the forwards will go down by around 15 basis points.