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DAYS WERE WHEN dealers shunned the rupee and the euro. Days are when forex players have no qualms trashing the dollar for the rupee and the euro, as forex markets shift preference for performers. For long the euro has been trailing the dollar and has now caught up with an US economy abounding in disfigured balance-sheets. There have not been any reports of dollar buying by central banks across the developing countries at the bidding of the US as the practice has never really worked in the past. The euro touched $1.0147 recently and the dollar-euro rate could go either way with the Fed Chief, Mr Alan Greenspan, contending the US economic recovery being on track.

The euro is a reserve currency for the RBI and there have in recent days been hints of the basket holding more of it. It could be that a portion of the dollar purchased by the RBI from local market is being swapped for the euro. On the domestic market, dealers are prepared to take a position on the rupee with the currency being under-valued against the dollar, a rarity indeed. Dealers are talking of a rupee-dollar quote of Rs 48.70 with exporters bringing in proceeds and Foreign Direct Investment flows holding strong. In the January-April 2002 period, various indices such as the Real Effective Exchange Rate (REER) and the Nominal Effective Exchange Rate (NEER) went up to make the point that the rupee is getting strong. The central bank has time and again cautioned that it does not act on the basis of movements in REER and NEER alone nor has it any rate in mind. But forex markets go by the thumb rule of a rupee depreciation of 5 per cent per annum which is not happening today. The RBI is prepared to build up dollar reserves when the going is good and seemingly the more the better.

Yet, all this would have been good news if it had been a fallout of robust economic performance. With the dollar falling against the rupee, exports from India could be tougher despite the trade being treated to concessional interest rates. Forward premiums have also fallen from around 7 per cent (annualised) in April to 4-4.5 per cent (annualised) now, getting exporters to unload dollars while importers hold back. Some growth projections have been made by the Planning Commission for the Tenth Plan under a base line of 6.5 per cent and an alternative of 8 per cent. At 6.5 per cent, there will be a decline in the average annual inflow of net capital as a percentage of GDP from 1.96 per cent in the Ninth Plan to 1.70 per cent in the Tenth implying a sharper drop in the ratio of outstanding external debt to GDP from 22.06 per cent on an average in the Ninth Plan to 18.13 per cent in the Tenth. Non-debt flows in total capital inflows could also move up from 0.87 per cent to 1.29 per cent. In the alternative model, net capital inflows and the non-debt part could go up.

Dealers admit that the forex market should not feel the strain of repaying some $10 billion (starting with RIB next year) in the coming years. With the RBI adding to forex reserves, the Indian economy can handle quite comfortably any temporary blips such as a drought or a steep rise in international crude prices. But strong forex reserves are premised on reforms — a point made by the Planning Commission.

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