The Hindu Business Line : Is the rupee losing shine?

AFTER betting on an appreciating rupee for the last six months, recent domestic and external developments have thrown currency experts and analysts into a tizzy about how the domestic currency will behave in the medium to long term.

The fate of the rupee seems to hinge on how things will shape up on the political front in terms of a `reforms friendly' government, increase in oil prices and on external factors, such as the possibility of a hike in the US Fed rate, contend analysts.

"If the Congress-led Government announces progressive and reform- friendly initiatives in its common minimum programme, this may encourage the FII investments back into the country. Consequently, this will mean an enhancement of dollar liquidity in the market, which currently is drying up as FIIs pull out from the equities market," said an analyst with a large Mutual Fund.

On the other hand, there are concerns if the US Fed hikes rates, this may slow down external investments into India, which will also exert downward pressure on the rupee.

In the past two weeks, the domestic currency remained extremely volatile, almost in tandem with the wild fluctuations in equities and bond markets. The rupee ended at 45.0450/0650 on May 10, at 45.60/63 on May 14 and ended at 45.28, on Friday, May 21. The short-to medium term outlook, however, is anybody's guess, say dealers.

"Last week rupee movements were purely driven by the events in Delhi. In the near future, there are a series of events which can have an impact on rupee; likely increase in the oil prices, adoption of the common minimum programme by the new Government and also the Budget, " said Mr U. Venkatraman, Head (Forex and Money Markets), IDBI Bank.

The main thing which will impact the markets is how much the present Government will give in to the demands of its allies and to what extent it will absorb the hike in oil prices, kerosene, cooking gas through subsidies, he said.

With the rise in inflation, in the event of a hike in fuel prices, domestic currency cannot continue to appreciate unless it is offset by strong capital inflows, which will depend on Government policies on foreign investment, he added.

One of the immediate concerns for market watchers is the possibility of a rise in inflation. According to one banker, even if inflation stabilises at 4.25 per cent levels, in case oil prices go up, inflation will also go up by about 25 basis points. Oil imports will also cause pressure on the rupee.

According to Mr G. Narayanan, General Manager, Treasury, Bank of India, oil prices are likely to increase, as internationally they are at $41 per barrel. This might trigger a rise in inflation when it might even breach the 5 per cent levels.