Inside banks' dealing rooms, the annual fiscal Budget event last Thursday, was as eagerly watched by foreign exchange (FX) traders as by the usual equity and bonds traders. The FX traders were looking for anything that will help improve dollar inflows into the country and relieve them of the intra-day volatility they face in USD/INR spot prices every day. As of close of trading on Friday, they stood disappointed as the INR depreciated a sharp two per cent from the pre-Budget levels of 53.65 to 54.90.
Looking beyond this event, while the spot prices show high intra-day volatility, the velocity of rupee depreciation witnessed in the August 2011-June 2012 period has clearly been arrested. Prices have since been in a range and, if at all, have twice attempted to break the range downwards to head below 53. This success can be attributed to the finance minister's zeal to work towards solving the twin deficit problem that the country faces today. Equally helpful has been the Reserve Bank of India's (RBI) deft handling of the velocity in spot prices through appropriate controls and interventions.
So, will we stay in this broad range of 53 to 56? Likely so. Slowly but surely, we are seeing the zeal of the government to solve the deficits convert into actions. Some of these, at a fiscal level, are:
a) Planned increase in diesel prices in small steps: While helping in reducing the oil subsidy bill for the government, at the margin, it is equally likely to dampen the growth in crude oil imports.
b) Help reduce gold imports: Increasing duties on gold imports and encouraging the use of financial instruments for hedging against inflation (Finance Bill also proposes reviving issuance of inflation-linked government securities) should hopefully cap our gold imports dollar bill.
c) Ministry of Commerce is preparing to announce further incentives to promote exports.
Similarly, RBI and the Securities and Exchange Board of India (Sebi) are gradually providing enabling regulations to help exporters and increase capital inflows. Examples are:
a) Increasing export refinance facility and enabling banks to take this facility as dollar funding from RBI.
b) Simplifying the debt FII limits structure by Sebi with a focus on attracting more debt capital inflows from real money funds, such as sovereign and central bank-sponsored funds and pension funds.
c) Budget's proposal to permit FIIs to hedge their currency risks through futures could, at the margin, help FII dollars to behave as a spot inflow rather than as one that gets placed with banks for buying a forward FX hedge.
More steps will be needed to somehow keep the balance of payments in the positive zone and thus, keep the USD/INR price in the range of 53 to 56. Steps from RBI, through monetary policy actions, which can facilitate an investment-led acceleration of growth, can help continue to attract foreign direct investment and FII investment dollars into the country. FX traders will now be eagerly watching the newswires and TV at 11 am, March 19.
The author is head of fixed income and currencies trading - Deutsche Bank, India.
The views expressed are personal
