War Could Spawn Edgy Sessions

The rupee is likely to be volatile against the dollar in case a war breaks out between the US and Iraq this week.

However, if the hostilities are postponed, the rupee could trade in a range of 47.65-70.

The rupee moved in a very narrow lane between 47.65 and 47.68 against the dollar last week.

The Reserve Bank of India (RBI) kept mopping up greenbacks all of last week through public sector banks as there was little to no demand for the currency in the market last week, except from oil companies towards the middle of the session.

And the dollar has been strengthening against the international currencies in the last few days of last week.

 

The euro, after touching a high of 1.10 (that is, one euro equal to 1.10 dollars), closed weaker on Friday at 1.0740.

The yen, after touching a high of 116.4 (that is one dollar equal to 116.4 yen) closed on Friday at 118.20.

Dealers feel that the strengthening of the dollar against the international currencies is due to technical reasons as well as rumours on Osama bin Laden and secret negotiations with Iraq.

Dealers, however, do not expect such a correction to take place against the rupee as the Indian unit is still undervalued against the dollar on a real effective exchange rate basis.

Dealers are also waiting to see the outcome of the resolution that is to be passed in the UN. If the US attacks Iraq without a supporting resolution, the dollar is likely to be under pressure internationally. In that case, the rupee could appreciate up to 47.60. The RBI is unlikely to allow the rupee to appreciate more. However, in case of a UN resolution supporting the war the dollar is likely to gain against the other currencies.

In this eventuality, the rupee is likely to depreciate against the dollar and could touch 47.75. The exporters then to bring in more forex proceeds into the market.

Forwards

Forward premiums are likely to be choppy and will depend on the situation in the Gulf. The six-month annualised forwards are likely to trade in the region of 3.40-3.75 per cent, while the one-year annualised premium could move in a band of 3.35-3.75 per cent. The market is also watching the US Federal Reserve