Rupee gains seen muted as FIIs lie low

The rupee, which had accelerated to a nine-year high to the dollar in 2007, is likely to move steadily within a 15-20 paise band before the current financial year ends March 31 on tapering dollar inflows from foreign institutional investors.

Treasurers and economists are of the view that inflows from portfolio investors into emerging market economies, including India, are likely to slow down due to the turmoil in global financial markets on account of the US sub-prime mortgage crisis.

"It is just a nervous market right now," said Sumita Kale, economist, Indicus Analytics. "In a normal world one would expect inflows to come into the market because of the rate cut (by US Federal Reserve), but it is not a normal world right now. I am not sure if foreign funds would like to send in money right now."

In September, when the Federal Reserve first cut interest rates by 50 basis points, Indian capital markets were flooded with inflows driving key share indices to life-time highs several times in the following months, and the Indian unit to a nine-and-half year high of 39.16 to the greenback.

FII investments into local equity and debt markets were at an all-time high of $5.3 billion in September, followed by $4.8 billion in October.

However, inflows into the domestic market were not so strong after the Fed again slashed the interest rates in December, and then by a further 75 basis points in a surprise move prior to its scheduled policy meeting January 30.

The US central bank announced a 50-basis-point rate cut at the end of its two-day policy meet January 30. FII investments in to Indian markets decelerated to $2.0 billion in December, while they turned net sellers of $3.8 billion in January.

This, despite the fact the successive interest rate cuts by the Federal Reserve have widened the rate differential between India and US to 475 basis points.

"Going forward one has to be selective as far as emerging market economies are concerned. Funds will have to be more careful now, rather than buying any type of emerging market assets," said Callum Henderson, head-foreign exchange strategy, Standard Chartered Bank, Singapore.

Treasurers also of the view that foreign exchange inflows post allotment of shares of some of the recently concluded large corporate initial public offers are likely to be muted, keeping a check on the rupee's gains.

A massive $11 billion is expected to be refunded to FIIs who had invested in the Reliance Power initial public offer last month. The net outflow from the mega Reliance IPO is estimated to be close to $6-$8 billion.

Most currency dealers now expect the Indian currency to trade in 39.30-39.50 range to the dollar in the short-term, due to global equity market uncertainty and its impact on Indian share market.