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`Rupee to rise steadily as dollar weakens'

Our Bureau

Mumbai , Oct. 3

THE Indian rupee is on a roll. It has appreciated 6.9 per cent since June 2002. It will appreciate further, according to a research report released by Standard Chartered Bank.

"The rise will be steady and not dramatic. The last year has seen strong growth, stable inflation, and falling interest rates. Reserves have risen from $ 25.8 billion to $ 87.8 billion. Our 12-month forecast for $-Re is 44.70. This compares to the current 12-month outright forward rate of 46.15," according to Mr M. A. Ravi Kumar, Regional Head of Global Markets, Standard Chartered Bank, India.

The report has observed that the Reserve Bank of India does not manage the rupee by merely looking at the dollar-Re rate. It also looks at overall competitiveness against India's trading partners taking into account exchange rates as well as relative price levels.

In other words, RBI monitors the real effective exchange rate (REER). Therefore, as the dollar continues to fall on a general basis the rupee is set to reflect this move.

The outlook for the Chinese Renminbi is also vital in determining how far the Indian rupee can strengthen. The report estimates that a move to a +/- 3 per cent trading band for the dollar-Yuan would imply a rate of 44.00 for dollar-Rupee, given the other likely knock on effects for other Asian currencies.

The apex bank has through its statements made it clear that there are risks with allowing a significant REER appreciation. Rising reserves have come from increased expectations of further rupee strength, which has changed the behaviour of market participants, seen in the shifting of hedge ratios. The RBI's recent measures to cap interest rates on NRE deposits to 100 basis points over LIBOR and the ban on overseas corporate bodies were taken to reduce the inflows from abroad to limit the appreciation pressure on the currency. After all, sterilised intervention cannot go on forever.

The main risk to the stronger rupee view is either that the dollar begins to recover or that the RBI takes increasing numbers of measures to prevent any REER appreciation.

There are also risks stemming from the upcoming elections, which could come as early as February 2004 and the high levels of fiscal spending, which are an issue for the rating agencies. In the end the rupee will continue to mirror the dollar decline. This could leave the rupee as strong as 44.00 against the dollar in a year's time, especially if the Chinese Yuan does move in a wider trading range and appreciate within it.

According to the report, the huge build-up of reserves in the last year is possibly due to the weak domestic investment over this period, which has meant that reserves have built up as the economy has not been able to absorb them. Reserve build-up will be slow when investment recovers.

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