The Hindu Business Line : Terror attacks may affect rupee in short term

Mumbai, Nov. 27 The terror attacks on Mumbai may have an indirect impact on the value of rupee, albeit in the short term. According to analysts, the rupee could open a tad lower on Friday.

However, there will be no long-term impact on the Indian currency, said dealers.

But some analysts are of the view that the situation is very fluid and volatile. “There is a need to wait and watch. The inflow of dollars into the country would depend on how the current situation pans out,” said an analyst with a rating agency.

Track equity markets

The rupee will take its cue from the movement in equity markets.

If the equity market falls on account of sales by foreign institutional investors, then the rupee will come under pressure, said the chief forex dealer with a public sector bank.

Though there could be a reduction in the tourism traffic, the tourism industry is already prepared for a same due to the possible recession. However, there could be some reduction in the inflow of dollars in the short term, said the analyst.

Sustained depreciation

Since the beginning of the current calendar year, the rupee has depreciated by around 26 per cent to 49.50. The sustained depreciation was on account of a mismatch in dollar demand and supply as foreign institutional investors sold in the domestic equity markets.

“The rupee could open weaker by 10 to 20 paise against the greenback on Friday due to the prevalence of negative sentiments in the market. However, support by the Reserve Bank of India will ensure that the rupee trades in the 49.60-49.80 range,” said Mr Moses Harding, Executive Vice-President, Head Global Markets Group, IndusInd Bank.

The incidents are unlikely to impact the long-term movement of the domestic currency, said Mr K. Harihar, Treasury Head, Development Credit Bank.

‘No impact’

There will be no impact of this terror strike on the trade and current account deficits. Besides, the corporates are already finding it tough to raise money through external commercial borrowings. This attack will not dampen foreign investor sentiments further, said dealers.

According to a report released by Citi Group, due to the ongoing deleveraging, the rupee would trade in the range of 50-51 in the near term.

According to Standard & Poor’s, as the global financial environment became more uncertain, capital flowed out of Asian markets and currencies depreciated sharply. Many of them have gone back, if not exceeded, to levels close to where they began appreciating.

“Of course, regional currencies (Asia-Pacific) will begin to appreciate again as capital flows back into emerging markets. This reversal is likely to take a while, however, as the global financial system returns to more favourable levels of activity and diversification. Although regional currencies may appreciate moderately during 2009 as a result of some reversal in capital flows, they are likely to remain at levels favourable to exporters,” it said.

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