Volatility to temper Re

The rupee is expected to be volatile in the near term in wake of the proposed restrictions on participatory notes, but it will continue to strengthen and breach the 39 level in few months, feel analysts.

"In the short term, the rupee will be volatile. However, in the long run, we will see the rupee breach 39 levels. Inflows will continue as more and more foreign institutional investors enter the country,'' said Parthasarthy Mukherjee, head-treasury at Axis Bank.

Of the $17 billion foreign portfolio inflows this calendar year, PNs are estimated to be around $10 billion.

"PNs have been a major and chronic source of contention between the Reserve Bank of India (RBI) and the ministry of finance (MoF), However, Sebi's announcement suggests that the ministry has given up, owing probably to the surge in capital inflows and the challenges these are creating for monetary management by the RBI," JP Morgan Chase said in a note on Sebi's discussion paper on proposed curbs on investments through PNs.

A key worry with policymakers appears to be that PNs are being abused by promoters and possibly politicians, as their funds parked overseas come back into India via PNs, JP Morgan Chase added.

India has seen over $17 billion of portfolio capital inflows in 2007, adding to the robust inflows on account of foreign direct investment (FDI), private equity flows and overseas borrowings.

The RBI's attempts at lessening the impact of foreign capital flows on the rupee has led to the forex reserves rising by a whopping $50 billion in 2007-08 so far.

Rupa Rege-Nitsure, chief economist at Bank of Baroda, said "The fundamentals remain strong. Not just FDI, but portfolio flows are coming into the country and they will continue. The rupee appreciation will continue but at a slower pace. By the calendar year-end, rupee is seen at 38.5-39 level. The RBI and government are concerned about at what pace the rupee appreciates."

"The equity market is due for a bigger correction and the rupee for a depreciation. However, it is rather strange to see the market move up after the discussion paper (on PNs). The rupee has seen very strong resistance at 39.80 levels. If there is no dilution in the suggestions of the discussion paper, we could see the rupee crossing the 40 levels to around 40.50 to a dollar,'' said Abheek Barua, chief economist, HDFC Bank.