Rupee Likely At 35.70-35.78 Levels

FOREX Market

The rupee is likely to come under pressure, weakening against the dollar on account of sentiment which followed Reserve Bank Deputy Governor, Y V Reddy's statement to the effect that the rupee was overvalued. Corporates are expected to react, at least in the near term, by coming in to buy dollars in the spot and forward segments of the forex markets.

Consequently, the market feels that the spot rupee will trade between 35.70 and 35.78 levels. In the forward segment, the six month annualised forward premium is expected at 4.7 to 4.75 per cent levels. However, the market is quick to point out that the extent of corporate demand is not likely to be much and exchange rates will largely hinge on sentiment.

 

Market sources also add that this sentiment is not likely to last for more than a week. This view is based on the fact that the inflow of dollars, particularly capital inflows, into the system is expected to remain strong. During the latter part of the week, the rupee should start strengthening, moving toward the 35.70-72 levels. Forward premiums should also start slipping once corporates seek to receive at higher levels.

In his speech Reddy, on one note acknowledged that the rupee appeared to be overvalued in real terms as per a study conducted by the RBI. However, he admitted that the RBI had to limit its intervention in the forex markets on account of the liquidity overhang in the money markets.

This reflects the RBI's wish for a weaker rupee. While corporates are making note of this, market sources feel that it will take a couple of months before there is any pressure on the rupee, as the credit off-take is unlikely to pick up till then. Increased credit off-take will raise demand for dollar and rupee funds in the markets thus tightening liquidity in the money and forex markets.