Govt Hopes Surge In Imports Will Weaken Re

The government, caught in a bind by the rupee's stubborn strength, is hoping a pick-up in industrial production and imports will restore the currency to a fair value, economists said on Sunday.

Meanwhile the government has no alternative but to let the Reserve Bank of India (RBI) continue to monitor the currency.

The rupee has shrugged off external factors such as the travails of the Thai baht largely because foreign investors continue to believe in India's economic future, the economists said.

There is confidence in the economy and the rupee. That is the reason why they are parking funds here, said V Raghuraman, secretary general of Associated Chambers of Commerce and Industry (Assocham).

 

But economists believe the rupee, which has been trading in the range of 35.75-90 per dollar for the past nine months, is overvalued and should depreciate by four to six percent annually to reflect inflation and other economic fundamentals.

I think it is extremely overvalued, Bidisha Ganguly, an economist with securities firm W I Carr told Reuters.

The rupee had strengthened on account on strong inflows of foreign funds, analysts and officials said. India's foreign exchange reserves stood at $27.29 billion on May 9 compared with $21.86 on May 10 last year.

Finance minister P Chidambaram said on Thursday he was against the rupee strengthening further as it would cause problems for exporters.

I would not like the rupee to strengthen because exporters will then complain, Chidambaram told Reuters. His comments caused a slight weakening in the rupee, but the currency bounced back later in the week.

Exporters have complained that the strong rupee was eroding their competitiveness in global markets. The finance minister said he was against any action to clip the rupee's strength, and trusted the RBI to carry out any necessary intervention.

At the moment I don't think we should try to do anything. We should just leave it to the Reserve Bank, which I think is monitoring the matter carefully. Economists said once industrial output, which has slowed down, and imports start picking up, there will be pressure on the rupee to depreciate.

Until the economy picks up it is difficult to peg a value for the rupee, Shashanka Bhide,an economist with National Council of Applied Economic Research (NCAER) said.

The rupee must depreciate by 6.0-7.0 percent, an economist with a foreign securities firm, who asked not to be identified, told Reuters.

We are pinning it on picking up of industry and non-oil imports, the economist said.

Industry grew at 7.5 percent between April and January compared with 11.7 percent a year earlier. It grew at only 1.1 percent in January against 12.9 percent a year earlier.

Imports grew at only 5.99 percent in 1996/97 (April-March) against 28.74 percent the previous year.