Rupee Expected To Fall Further Against $
Going by economic fundamentals, the rupee has to depreciate to keep pace with the level of inflation differential which is around 6 per cent now. Allowing for this factor, the depreciation of the rupee by 6-7 per cent per annum is considered normal. Over the last two-three months, there has been a depreciation of 2-3 per cent as compared to spot rates of the rupee against the dollar from June 1996. Over the next six months (which will also be the end of this financial year) there will be a further depreciation taking the annual figure to 6-7 per cent.
According to bankers, the outflow of a large amount of dollars (estimated at $ 5.7 billion) by March 1997 will be compensated for by inflows in the form of FII investments, foreign direct investments and loans from the World Bank and the IMF. There will also be some inflow through global depository receipts issues of a large number of companies which are in the pipeline. The rupee depreciation will be governed chiefly by these factors.
Market sources said the Reserve Bank will continue to buy dollars in the market to meet its debt servicing requirements. The government will resort to external commercial borrowing only if dollar absorption by the Reserve Bank leads to sharp fluctuations in the market. Until then, the Reserve Bank will continue to buy dollars in the domestic market to service its debt and shore up its reserves.
Over the last four-five months, the RBI has bought a little over half a billion dollars in the domestic forex market to service the debt and regulate the rates to ensure only a gradual decline in the rupee value.
Forex experts say that at each fall of the rupee against the dollar, there is a weakening of the rupee as it tends to open lower on the subsequent days. There has been therefore a continuous fall in the resistance of the rupee over the past few months. Each time the rupee declines, the RBI buys it at successively lower levels which has made it more or less impossible for the rupee to appreciate beyond Rs 35.65/70 levels.
Bankers said the RBI was playing a crucial role in stemming a sharp fall of the rupee against the dollar. The apex bank has bought a large amount of dollars out of the market. This has happened mainly in the case of GDR funds which have not been allowed to come into the market as the sudden influx of a large amount of dollars would have upset the rupee in a big way. There is a feeling that if the RBI buys dollars from the market and there is a spurt in dollar demand from a nationalised bank, the RBI will have to allow some of the funds to come into the market.
Marketmen however say that over the next six months, there will be an increase in imports as industrial activity has once again begun to increase. So, the rupee may slide faster than it has over the last three months.
However, the extent of depreciation will finally depend on the strength of inflows on account of FII investments, FDI, GDR inflows and the size of imports.