The Sensex crossing the 15,000-mark has left currency dealers anticipating another milestone event in the money market — a breach of the Rs 40-mark by the US dollar. With the central bank being unmoved with the dollar falling below the 40.5-mark, both economists and multinational banks feel that there is a strong likelihood that the rupee may trade between 39.80-40 levels against the dollar in the near future.
Just a few months ago, certain research houses and multinational banks had revised their bearish forecasts for the rupee (made before March 2007) and replaced them with a less bearish forecast of the dollar at 42.50-43 levels by December 2007. However, seeing the global movements, the forecasters are set to review their stance. Standard Chartered Bank’s MD and regional head, global markets and South Asia, Sundeep Bhandari, explained,
“We have kept our forecast for December 2007 (at 42.50 levels against the dollar) under review. The 40-mark is indeed a huge milestone for the rupee, which the central bank is unlikely to allow.” Treasury managers feel that the rupee is largely strengthening on the back of a buoyant stock market. While the forex market is expected to be extremely volatile, they feel that traders would continue to test the rupee at higher levels.
For a long time, the rupee had been hovering above the 40.50-mark per dollar. This was one level which even the central bank was seen protecting. Usually, when the rupee starts growing stronger, the central bank tries to prevent it from rising too much within a shorter span of time, by purchasing dollars and infusing rupee-funds into the market.
However, between March and June, the central bank was more concerned about the spiralling price levels, with the wholesale price index quoting over 6%. Now, what happens is that when the central bank tries to protect the rupee by buying the greenback, it ends up selling rupees and this forces the cash flows to rise, thus impacting inflation levels negatively.
This was why the central bank allowed the rupee to rise, in a bid to curb price levels from rising further. Thus, between March and June alone, the rupee rose by over 8.5%. Kotak Mahindra Bank’s treasurer Mohan Shenoi said, “Fresh flows into public offerings and secondary market and hedging by exporters is leading to strong supply of dollars. Dollar purchases made by oil companies and intervention by the central bank to absorb flows are keeping the support at Rs 40.40 intact for the time being.”
Mr Shenoi pointed out that in line with the overall monetary policy considerations, if the central bank stops absorbing capital flows even temporarily, the rupee could rise to even the 39.80 level per dollar. However, if it falls to 40.70-40.80 levels, it may attract large scale dollar sales by exporters, he added. Other factors, which could lay brakes on the rising local currency, could be the rising oil prices and a growth in government spending, which tends to pick up in the second half of the financial year.
ICICI Bank chief economist Samiran Chakraborthy pointed out that the appreciation in the rupee may recede, once the pipeline of FII inflows cease. Oil prices could serve as the third trigger for short-term movement in the rupee as demand for dollars from oil companies may even cause the local currency to weaken.”
Just a few months ago, certain research houses and multinational banks had revised their bearish forecasts for the rupee (made before March 2007) and replaced them with a less bearish forecast of the dollar at 42.50-43 levels by December 2007. However, seeing the global movements, the forecasters are set to review their stance. Standard Chartered Bank’s MD and regional head, global markets and South Asia, Sundeep Bhandari, explained,
“We have kept our forecast for December 2007 (at 42.50 levels against the dollar) under review. The 40-mark is indeed a huge milestone for the rupee, which the central bank is unlikely to allow.” Treasury managers feel that the rupee is largely strengthening on the back of a buoyant stock market. While the forex market is expected to be extremely volatile, they feel that traders would continue to test the rupee at higher levels.
For a long time, the rupee had been hovering above the 40.50-mark per dollar. This was one level which even the central bank was seen protecting. Usually, when the rupee starts growing stronger, the central bank tries to prevent it from rising too much within a shorter span of time, by purchasing dollars and infusing rupee-funds into the market.
However, between March and June, the central bank was more concerned about the spiralling price levels, with the wholesale price index quoting over 6%. Now, what happens is that when the central bank tries to protect the rupee by buying the greenback, it ends up selling rupees and this forces the cash flows to rise, thus impacting inflation levels negatively.
This was why the central bank allowed the rupee to rise, in a bid to curb price levels from rising further. Thus, between March and June alone, the rupee rose by over 8.5%. Kotak Mahindra Bank’s treasurer Mohan Shenoi said, “Fresh flows into public offerings and secondary market and hedging by exporters is leading to strong supply of dollars. Dollar purchases made by oil companies and intervention by the central bank to absorb flows are keeping the support at Rs 40.40 intact for the time being.”
Mr Shenoi pointed out that in line with the overall monetary policy considerations, if the central bank stops absorbing capital flows even temporarily, the rupee could rise to even the 39.80 level per dollar. However, if it falls to 40.70-40.80 levels, it may attract large scale dollar sales by exporters, he added. Other factors, which could lay brakes on the rising local currency, could be the rising oil prices and a growth in government spending, which tends to pick up in the second half of the financial year.
ICICI Bank chief economist Samiran Chakraborthy pointed out that the appreciation in the rupee may recede, once the pipeline of FII inflows cease. Oil prices could serve as the third trigger for short-term movement in the rupee as demand for dollars from oil companies may even cause the local currency to weaken.”
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