Majority Govt Key To Rupee Stability

A majority government would offer a stable plank for Indias economic policy-making and ensure steady growth, shielding the rupee from sharp fluctuations, bankers and analysts said.

The economic reforms process is irreversible and which ever party comes into power, economic policy wont change much, said Ravi Pai, vice president, treasury and foreign exchange at HDFC Bank.

He said a majority government would encourage foreign institutional investors who prefer Indias steady reform to the confusion reigning in South-east Asia.

Analysts said a stable government would boost the economic reforms process and ensure steady growth.

Citicorp International Securities Ltd, in a research report this month, said a strong elected government combined with existing fundamentals could help currency stability and keep prices down. A stable rupee, reduced oil prices, large food reserves and a manageable deficit will keep inflation within four to five per cent, Citicorp's report said.

 

Despite falling by some 8.3 per cent in the last six months the rupee has been stable since the Reserve Bank of India (RBI) hiked interest rates in a currency defence package after it hit a historic low of 40.45 per dollar on January 15. It closed on Friday at 38.92/95.

The rupees fall came amid a slowdown in capital inflows and increased competition from plummeting Asian currencies.

The Citicorp report said the rupee was unlikely to depreciate more than the rate warranted by inflation. A coalition without ideological agreement would slow the pace of reforms and cause stagnant development, the report said.

The key question is whether the portfolio inflows, which showed signs of picking up in February after declining during November to January, will be sustained," said foreign exchange consultant A V Rajwade. (Reuters)

Net investments by foreign institutional investors rose $36.1 million during February 1-13, reversing a three-month trend, the Securities and Exchange Board of India (Sebi) said. Net FII outflows in November-January were $385.8 million.

Rajwade said India could face competition in attracting foreign investments as other Asian economies recovered. If portfolio investments are positive then the rupee will be fairly stable over the next seven months, he said.

Bankers said a key factor determining the stability of the rupee was the level of interest rates. The rupee stabilised after mid-January, thanks largely to sledgehammer tactics used by the RBI, said the country treasurer of a foreign bank, speaking anonymously.