The Indian rupee, which underperformed most regional currencies in the first half of the year, is gaining strength day by day and charting a future direction for itself, with foreign investors regaining confidence in the economy, global financial services provider UBS said. | |
| "The factors responsible for the weakening of the rupee have now either reversed or mitigated substantially, giving strength to the rupee and the INR appreciation story is here to stay," the UBS Investment Report said. |
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| This reversal is in stark contrast to the rupee's performance in the first half of the year, when it was bogged down by the trickling portfolio inflows, skyrocketting oil prices and an expansive monetary policy aimed at garnering liquidity in the system. |
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| Falling oil prices have triggered off a chain reaction, wherein lumpy payments of crude purchases have receded. |
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| After the sudden pullout by foreign investors during the May meltdown of the markets, portfolio flows are once again averaging to $1 billion each month, although this is lower than the levels seen in the first quarter of 2006. |
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| Interestingly, overseas corporate borrowings have picked up in recent months and UBS predicts that this foreign currency borrowing could exceed $17.3 billion level in the current financial year. |
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| The Reserve Bank of India has also eased norms for overseas borrowing in the October Monetary Policy Review. Now corporates can borrow $250 million (in a year) without prior approval, if the maturity of the loan is 10 years or more, which is over and above the previous annual limit of $500 million. |
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| However, India's monetary cycle shows a marked difference with the rest of the world and is not in line with the US Fed. |
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| "The October Monetary Policy Review was clearly hawkish in our (UBS) view, despite the RBI citing concerns on the hectic pace of credit expansion, risk of the emergence of demand pull inflation and elevated asset prices," UBS Senior Economist Sanjay Mathur said in the report. |
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| The divergent monetary pace of the country can lead to widening of interest rate differentials and could motivate recourse to overseas funding. |
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| In this scenario, funding the country's current account deficit of around 3 per cent of GDP would become problematic. |
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| The aggressive overseas asset acquisition by corporate India in the current year has made the foreign direct investment remain low on net basis but has improved on a gross basis. |
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