Downward bias on rupee seen

OUTLOOK/ Currency

The spot rupee is expected to hover this week in the range of 46.30-80, with a downward bias given the inflation figure of 7.51 per cent. Meanwhile, the job data released in the US pulled down the Dow 148 points on Friday and this could be a trigger for dollars to depreciate globally, leaving scope for the rupee to gain on the back of global movement of dollar. Moreover, the market is expecting an inflow of around $400-500 million into India through the proceeds of initial public offer of Tata Consultancy Services.

Dealers said if inflows come and RBI supports, the rupee will hold on to 46.30-50. However, if oil prices go up and inflows also take time, it might touch 46.80.

The source of liquidity in the foreign exchange market is in a standstill as foreign institutional investors have become fencesitters. "This will be the case till the Union Budget proposals are passed and signals of the government on the foreign investment are clear " said a dealer.

Clear guidelines on the announcements pertaining to the external sector are necessary so as to enable foreign exchange inflows into the country. This is significant as the coalition partner , the Communist Party of India is strongly opposing foreign direct investment.

Over the last few weeks, the spot rupee has been depreciating with dollar demand coming in from foreign banks in a big way. Almost every day, the central bank has been selling dollars to support rupee at 46.50 and below . This has resulted in the reserves falling for the second consecutive week by over a billion to $118 billion.

Corporates are rushing to hedge their positions and more inter-bank demand is expected to surface. Moreover, dealers feel that there is a good arbitrage opportunity between the domestic forex market and the non-deliverable forward market overseas.

Forward premiums moving upwards

Forward premiums will be on a rise since exporters, who had earlier booked receivables, are cancelling and rebooking positions in anticipation of higher premiums.

Demand for dollars is coming mostly in the near-term maturity segment. This is because, the long-term view on rupee hinges on various foreign investment policies announced by the government in the budget. Though there is a feeling that the announcements are pro-reform, it is yet to get ratified by Parliament. Therefore, foreign exchange inflows are not as copious as it used to be.

This, in turn, is putting pressure on the spot rupee, and with every incremental increase in its level importers are getting panicky. This is resulting in higher premiums on forward dollars.

Moreover, the investment limit for foreign institutional investors in the debt market has been hiked from $1 billion to $ 1.75 billion. Although it is a strong measure, fresh inflows are yet to be seen.