Gone For A Toss

Sweat beads are trickling down RBI governor Bimal Jalan’s face as he watches the daily slide of the rupee against the dollar. Over the past 90 days, the rupee has depreciated by a huge 4.6 per cent vis-a-vis the US currency. All of last year it fell by just a little over 2 per cent.

When it crossed the Rs 45 to the dollar mark on July 21, Jalan was worried enough to raise the inter-bank interest rate by one per cent, followed by a 25 basis points hike in banks’ cash reserve ratio (CRR). Last week, four-day repo rates went up to 15 per cent. That apart, the RBI exhausted $1.8 billion of its reserves in an attempt to rein in the fall. All these were moves to suck Rs 15,000 crore out of the system in the central bank’s bid to reduce the demand-supply imbalance that existed between the two currencies. The first two moves, at least, were of little help as the rupee touched 45.77 to a dollar during intra-day trading last week. Even as one-month forward premia on the dollar shot up four percentage points to 7 per cent, while six month premia rose a per cent-and-a-half to 4.5 per cent.

Considering that an increase in interest rates is bound to have an adverse impact on industrial growth, should Jalan have bothered with these strong measures? While the jury is still out on that, forex traders prefer to put this recent 4.6 per cent fall in perspective. "The rupee has historically depreciated by six per cent annually against the dollar," says the forex chief of a multinational bank.

So, should we panic? Not really, for this is not about a depreciating rupee; it’s more about an appreciating dollar. In fact, the rupee has actually appreciated by about Rs 2 against currencies like the pound. As Jalan pointed out in a statement, other currencies have performed worse against the dollar (see chart). For instance, since April 1, the Indonesian Rupiah has depreciated 9.7 per cent and the Philippine Peso 8.5 per cent. Given the churning in the global forex market, the Chinese central bank may be mulling a 3 per cent devaluation of the Yuan, say analysts. And the dollar’s appreciation hasn’t happened against Asian currencies only. Ninety cents per Euro is the going rate against the 1.2 dollars exchange rate that existed when Euro gained currency on January 1, 1999. Even the pound has recorded a slight depreciation against the dollar.

The dollar has been appreciating against other currencies in the forex basket due to the high earning numbers recorded by the US economy. Over the last few quarters, the five per cent-plus growth has forced Federal Reserve chairman Alan Greenspan to hike interest rates in an attempt to prevent inflation. This has caused savings in dollars to grow and reduced the outflow of dollars to other countries, resulting in an appreciating dollar.

Like other currencies, not only did the rupee have to battle this phenomenon, it has fought other domestic compulsions as well. For instance, Centre for Monitoring the Indian Economy predicts forex inflows at $9 billion for 2000-01 will be almost a billion less than last year. In fact, FIIS withdrew $535 million in June-July, plus crude prices have been hovering around $28 a barrel, much higher than what they were last year. In addition, foreign currency repatriations are also reported to be lower than the previous year. "A higher oil import bill and FII outflows were bound to put pressure on the rupee," says Gautam Adani, chairman, Adani Exports, India’s largest export house.

Since exporters expected the pressure on the rupee, they didn’t sell the dollars they held and that only pummelled the rupee further. "We expect the rupee to trade in the 46-46.50 range by next March, so we are only selling dollars as per our requirements," says Adani. Others are even more pessimistic. Says Vikas Suri, head of foreign exchange at Standard Chartered Bank: "The rupee should cross the 46 mark by the end of this calendar year."

But even then the performance of the rupee is much better than other currencies. At any rate, by the end of last week the RBI had managed to stem the slide by getting corporates to bring in their ecb proceeds. Plus, when the bse Sensex was trading at 4200-4300 levels, FIIS saw some bargains and began pumping in money again. With the result that the rupee was trading at 45.55-45.65 levels by the week-end. "In the short term, a lot depends on FII inflows," says Suri. "Neither do we expect a hike in US interest rates; so this should keep the rupee constant in the short term," he adds.

But in the medium term, it will be the growth of Indian exports and US interest rates that’ll determine where the rupee stands, the central bank’s brainstorming notwithstanding.