The Hindu Business Line : The rupee flux

NOT MANY SHARE the fret in the foreign exchange market over the rupee dropping to Rs 44.96 against the dollar as forward premiums, a sure indicator of dollar demand, are still low at between 0.75 per cent for three months and one per cent for a year. Government banks seem to have sold dollars while the Reserve Bank of India has not publicly shown its concern with inflation still below the 5.5 per cent mark and forex reserves ruling strong. The current account deficit for the quarter ended June 2005 has become negative at about $6.2 billion but that is to be expected with strong economic growth, of over 8 per cent, and a zooming crude import bill. The RBI has explained that buoyant economic activity is behind 78 per cent of the increase in non-oil imports, far ahead of the crude import bill which grew by 31 per cent.

The present flux could correct the impression of an under-valued rupee apart from aiding exports with a consequent rise in the cost of imports. If the US Federal Reserve marks up fund costs in the near future, the interest rate differential between world markets and India could whittle arbitrage opportunities. A three-year external commercial borrowing now costs around 7.20 per cent which is, in fact, costlier than a domestic rupee loan at around 7 per cent. ECB approvals in April-May, at $1,266 million, were lower than the $1,910 million in the same period last year; against this Foreign Direct (April-May) and Institutional Investments (April-June) have moved up sharply to $922 million ($434 million) and $435 million ($ -88 million) respectively. Yet, markets are not to be predicted what with corporates nursing unhedged positions rushing to take dollar cover; that again is surprising as top companies have treasury desks and taking cover is a normal business prudence.

Gross receipts from invisibles for the quarter ended June 2005 have grown at 46 per cent and this trend may continue going by the healthy second quarter results of Infosys and TCS. Still, treasury heads are betting on a mark up of the reverse repo rate (the price offered by the RBI on loose bank funds), at the October 25 quarterly review of Monetary Policy, on fears of inflation and tight rupee liquidity, though the Finance Minister, Mr P. Chidambaram, recently talked down the move. Free funds under reverse repo are still over Rs 17,000 crore and the unwinding of holdings under Market Stabilisation Scheme guarantees extra cash. The economy is doing well with agriculture growing at a slow two per cent and not exerting pressure on prices. There is a disconnect between market and bank lending rates with banks trying to outdo one another to press cheap funds on corporates already sitting on piles of cash. Banks are opting for public issues to widen their asset base and to conform to Basel II norms. Government borrowings will be hurt most with the sovereign picking money from the market at rates above sub-PLR (prime lending rate) bank lending. Any upward shift in the price of money by the RBI will be a premium on efficiency.

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