The Hindu Business Line : Rupee to see choppy trade in 2008

Outlook
Rupee will continue to strengthen till September and may weaken thereafter.
Political situation in the country may also have a bearing on exchange rates.

Shobha Kannan

Mumbai, Dec 31 The rupee will exhibit a choppy behaviour in 2008, say senior bank officials and foreign exchange dealers. The general consensus among dealers is that the rupee will continue to trade steadily at current levels of 39.40-39.50 in the first few quarters and then weaken post the second quarter of the next fiscal.

Mr Ashvin Parekh, Partner, National Leader-Global Financial Services, Ernst & Young, said that the rupee would continue to rise against the dollar in the first few quarters of the next fiscal. “By the third quarter of the next year, the interest rate situation in the US will stabilise and that will prompt the dollar to gain ground against major currencies,” said Mr Parekh.

Some analysts feel that the kind of capital inflows into the markets will largely determine the movement of the currency. Mr Ravi Pai, Head- FX and Derivatives, Treasury, HDFC Bank, said: “If there is a slight moderation in inflows then it will curb the volatility, however, if there are significantly large flows then the rupee will exhibit choppy behaviour. The central bank will try to cap the rise of rupee thereby curbing the volatility to some extent,” said. The political situation in the country could also have a bearing on the exchange rates.

Fastest, sharpest rise

The rupee, which was at 44.30 in January 2007, is now up at 39.41, as on December 31. The home currency surged to a nine-year high of 40.29 for the first time in May backed by strong inflows, thereafter showing steady signs of appreciation. While the year 2006 saw the rupee strengthen by a modest 1.86 per cent, 2007 witnessed one of the fastest and sharpest appreciations in the currency in a single year.

Dealers and market participants did not expect the rupee to appreciate so strongly in the beginning of the year. Mr Navin Raghuvanshi, Associate Vice-President, Treasury and Financial Institutions Group, Development Credit Bank, said, “The market even predicted the rupee to weaken to 47 as there was no strong reason for its appreciation. The sharp appreciation of rupee took the market by surprise.”

The sudden and sharp rise in rupee cast its spell on a number of sectors such as IT, BPO, gems and jewellery and the textile industry. Mr R.V.S. Sridhar, Senior Vice-President –Treasury, Head-Markets, Axis Bank, said, the rupee marathon has hurt exporters as they were under prepared to tackle it.

“The industry was prepared for a 3-4 per cent rise in rupee and not more than that. This kind of a sharp appreciation has caught people unaware,” said Mr Sridhar. While companies in the gems and jewellery space took an 8-9 per cent hit on the bottomline, profitability of IT firms was impacted by10-12 per cent.

However, IT/BPO companies have factored for the further appreciation of rupee in their strategy for 2008 and are taking operational measures to mitigate the risk. “Rupee appreciation has been a concern with existing contracts but for all future contracts, rates are being negotiated considering new exchange rates. Forex covers and forex loans act as a natural hedge for existing contracts,” said Mr Susir Kumar, Chief Executive Officer of the BPO firm Intelenet Global Services.

The strong rupee, however, had a positive impact on sectors such as travel and tourism. “We have both outbound and inbound tourism, which becomes a natural hedge for the company against exchange rate risks. It is only the incremental amount that needs coverage,” said Mr Madhavan Menon, Managing Director, Thomas Cook.

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