RUPEE
Forecast $=Rs 44 by 2000

The rupee pierced the 43-a -$ barrier on Jun.8,'99. Will it be a downhill journey now, in view of the cost of the Kargil operations? Capital Market spoke to three experts

A marginally downward drift

But the manner in which the government and, in particular, our armed forces have achieved victory is remarkable. This has also stimulated the confidence in the management of the economy, which has already started looking good thanks to the recovery in key facets of macroeconomic fundamentals - be it industrial growth, stock market trends or inflation.

Having said this, we, nonetheless, believe that there will be an impact of this unfortunate development on our defence expenditure and consequential fiscal management. No doubt, in the immediate short run, it will be possible to absorb the cost of the war and its temporary dislocations.The exchange rate of the Rupee can, therefore, be reined in within reasonable bounds.

However, when we talk about the medium term, we are referring to the next six to eight months, and, on a longer-term basis, the period beyond one year. The exchange rate behaviour during this period is obviously going to be influenced by three set of factors: l the supply-demand position of the forex reserves; l The technical position of the market l Expectations and speculative pressures. On current reckoning, in all these three areas, there are no major mismatches being witnessed.

Moreover, the Reserve Bank of India (RBI) is also seized with the problem of steering the Rupee on a relatively stable basis. As a consequence, we expect the Rupee to show only a marginal downward drift, moving towards $=Rs. 44 or so in the next six to eight months, from its present position of $=Rs.43.20. On a longer-term perspective, the behaviour of the Rupee will be decided by the extent of inflation differential in India and her major trading partners. Besides, certain extraordinary developments in the international financial markets can also influence the Rupee value. Although there are basic limitations of real effective exchange rate in determining the value of the Rupee, RBI would, by and large, be constrained to anchor the Rupee around the real effective exchange rate (REER) level.

India's external debt outstanding by original maturity
The outstanding stock of external debt reached a peak of US $ 99.01 bln at end Mar.'95 before declining to US $ 93.73 bln at the end of Mar.'96. The debt stock stood at US $ 93.91 bln at end Mar.'98 before increasing to US $ 95.72 bln at the end of Dec.'98. The increase could largely be attributed to the success of Resurgent India Bonds floated in Aug.'98
	9812 (Provisional)
	US $ = Rs 42.53		$ = 43.3
	US $ mln	Rs cr
Long-term debt	92083	361672	398719
Short-term debt	3632	15429	15726
Total debt	95715	407101	414445

Keeping in view the behaviour pattern of the last five years, on an average, we expect the Rupee to depreciate by about 5.5% per year, taking it towards $=Rs 54 by 2003 or so. Implications of the post-Kargil scenario is unlikely to be adverse on the current level of our forex reserves. It is evident that the Indian economy is looked upon as a favoured destination for capital inflows, including foreign direct investment. Given the reasonable political stability (which depends on the outcome of the forthcoming elections), it will not be difficult for us to mobilise substantial capital inflows, thereby meeting the likely gaps in the current account of our balance of payments.

---

Top

No smooth sailing

On the whole,the 56 days of Kargil skirmishes reverberated only marginally in the forex market,less than the expectations. The Rupee lost over 1.5%, i.e., 60 paise in a matter of 25 days. But the Rupee fall cannot be solely attributed to the border issue. The disturbed period was accompanied by political instability. In spite of these unfavourable developments, the overall balance of payments position remained strong as evident from the rise in foreign currency reserves. The reserves went up by $1 bln to $30.6 bln as on May 28,'99. The Rupee marginally depreciated by 0.11% in May'99. Net investments by FIIs remained high at $600 mn during Apr.-May'99 compared with $243 mln outflow during the same period of 1998.

In some ways the current political situation, i.e., caretaker government, has been good for the Rupee as there is bound to be a lack of political pressure on RBI to drive the Rupee either ways.

The Rupee movement, unlike the equity market, does not perform a price discovery function in India. The Rupee value is more determined by the policy of RBI. It is likely to settle around Rs 44.00/44.25 by Mar. 2000 compared to the present forward rate of Rs 44.78 per $. This means an effective depreciation of 3.5-4.0% over Mar.'99 and a compounded annual depreciation of 5% over Mar.'93.

It seems that the RBI would intervene to prevent the Rupee from crossing the $ Rs 44 mark in the next few months. However, with inflation at a 19-year low, there is an urgent need to depreciate the Rupee in order to improve India's trade competitiveness.

The RBI has repeatedly said that it does not depend only on the Rupee's REER for exchange rate management. However, it seems taht over the next 2-3 months, ensuring the stability of the Rupee in REER terms would be one of the RBI's prime objectives. On the whole, the Rupee is expected to remain weak though any volatility would be followed by RBI measures to reduce volatility.

Exchange rate volatility of the US $ (Mar.'97 to Dec.'98)
The US $ is the commonly used numeraire for external debt data. External debt of a country, however, has many constituent currencies, and variation in their exchange rate vis--vis US $ affects the aggregate value of debt in US $ terms. Between end-Mar.97 and end-Mar.'98, US $ appreciated against major international currencies except Pound Sterling. Valuing end-Mar.'98 debt at end-Mar.'97, exchange rates show an increase of US $ 3.11 bln over the end-Mar.'97 level of US $ 93.47 bln, or a rise of 3.3% over the end-Mar.97 level. However, the US $ depreciation against major currencies (except the Indian rupee, Pound Sterling and Canadian Dollar) during end-Mar. to end-Dec.'98. Valueing end-Dec.'98 debt at end-Mar.98 exchange rates shows an increase of only US $ 0.11 bln to US $ 94.02 bln (as against the actual level of US $ 95.72 bln) or by 0.1% over the end Mar.'98 level.
Currency	End-period exchange rates			Appreciatation (+) or Depreciation (-) of the US Dollar between
	Mar.’97	Mar.’98 (Rates per US $)	Dec.’98	Mar.’97 to Mar.’98 (%)	Mar.’98 to Dec.’98
SDRs	0.721	0.7486	0.7102	3.7	-5.4
Indian Rupees	35.91	39.5	42.48	9.1	7
Japanes Yen	124.05	132.05	115.6	6.1	-14.2
Deutsche Mark	1.6778	1.8468	1.673	9.2	-10.4
Pound Sterling	0.6138	0.5952	0.6011	-3.1	1
French Franc	5.6435	6.1845	5.6221	8.7	-10
Netherland Guilder	1.8902	2.0806	1.8888	9.2	-10.2
Canadian Dollar	1.3843	1.4166	1.5305	2.3	7.4
Note: Only those currencies in which at least 0.5% of India’s external debt (valued in US $ terms) is denominated are included in the table. Source: International Financial Statistics, IMF

In contrast to the volatility in the Rupee, the forward market premia has been less volatile, thanks to RBI's active intervention.Rupee, the forward market premia was less volatile, thanks to RBI's active intervention.

Though RBI's forex reserves are coming under pressure, these are still comfortable at about $ 30.4 bln in comparison to the relatively low daily volume of $ 300 mln in the forex market. This forex reserves level imparts enough manoeuvreability to RBI to defend the currency. However, reserves can come under further pressure due to likely import of ammunitions on a large scale.

The political uncertainty and border skirmishes prevailing in India have not deterred foreign investors from investing in India. Applications for FDI continue to flow in and recently, FIPB has cleared 26 projects amounting to Rs 202 cr. Besides, actuals to approvals ratio of FDI is increasing.

Though FDI investment at $ 2,062 mln in 1999 was significantly lower than $ 3,192 mln in 1998, other forex inflows like FIIs, acquisition of shares by NRIs, remittances, etc. have remained buyount.

Since forex reserves are at a comfortable $ 30 bln, it is possible for RBI to intervene in the forex market to keep the Rupee stable. However, as the intervention has implications for the domestic monetary policy, which at present has become sensitive issue due to the fledgling industrial recovery, the RBI would tend to be cautious about its intervention policy.

---

Top

No undue depreciation

From the pre-Kargil position of 42.90 a $, the Rupee moved to 43.40 during the prolonged Kargil conflict. In this journey, the Rupee transited at 43.10 levels before reaching the 43.40 peak. In the post-Kargil scenario of today the Rupee has already gained a few paise, thanks to increased FII inflows and anticipated corporate inflows. The rupee may hover around 43.12/15 levels in the short-term. Much would depend on the much talked about FRN outflows of US$ 250 mln of Essar materialising and exerting pressure on the Rupee.

Assuming the outflows do not exert pressure, 43.10 a $ may be the bottom the Rupee may touch. More realistic levels would be 43.15. The central banking authority also is perceived to be comfortable with Rupee being at levels of around 43.10. This perception gains credibility due to the fact that it had off loaded $ 600 mln to check the slippage of Rupee during the Kargil conflict and is expected to recoup this amount if the Rupee slips below 43.10

In the medium term of about six months, the Rupee may hover around 43.20/43.30 levels, except for sudden jerks in supply or demand.

---

Top