A fortnight ago, when the withdrawal of Pakistani troops from Kargil gave way to guerrilla warfare, the nervousness of the forex markets started coming to the fore. The rupee has been on a roller-coaster ride against the dollar since last month. From a high of 43.20 against the dollar in mid-July, the rupee started dipping largely on account of corporate demand for dollars. The end of the month saw the rupee falling further to 43.31 due to high month-end demand of dollars. By August 9, the rupee had touched an intra-day low of 43.59 against the dollar before rebounding to finish the day at 43.41.
Says K.N. Dey, senior vice-president, Mecklai Financial & Commercial Services, a Mumbai-based forex trading firm, 'The shooting down of the Pakistani aircraft and sporadic violence in Kashmir had a momentary impact on the forex markets no doubt, but corporates today are far too mature for the nervousness to be long-lasting.' Concurs Amit Gupta, head of treasury markets, hsbc Markets: 'There was a minor movement of the rupee southwards which could be related to the border conflicts, but even in the extreme case, the rupee fell by a mere 0.75 per cent, which was hardly a cause for concern.'
In fact, according to forex experts, substantial reasons other than the Kashmir conflict were responsible for the pressure on the rupee. Says Dey, 'One striking feature of the rally on rupee is that the forex reserves of the Reserve Bank of India (RBI) have gone up by $540 million over the last month. Obviously, the RBI has been buying up dollars that it had sold earlier. The result was the pressure on rupee.'
President of the Federation of Indian Export Organisations, Navratan Samdria, has said the decline in the value of the rupee vis-a-vis the dollar was due to corporate demand for the greenback and remittances that had to be made for the 81 tonnes of gold imported recently. 'The decision of the major oil companies to pay off their foreign debt from the money they received from the government against oil bonds held by them is also a reason for the recent fall in the Indian rupee,' Samdria said in a press statement.
Oil products prices have increased by more than 30 per cent since March, when crude-oil prices turned the corner at $11 a barrel. By conservative estimates, the import bill on this score is expected to touch $9.8 billion by March-end, or $0.5 billion more than the all-time high of $9.32 billion in 1996-97. Says Dey, 'Indian Oil and the State Bank of India have been buying dollars in a phased manner and that should not put any untoward pressure on the rupee.'
Besides, the fast soaring crude-oil price coincides with a nearly 40 per cent growth in India's oil-refining capacity. Reliance Petroleum has commissioned its giant refinery at Jamnagar in Gujarat, and Mangalore Refinery and Petrochemicals is expanding capacity. The 3-million-tonne Numaligarh Refinery will go onstream soon. So, while crude prices are up, demand will also soar, leading to a massive crude-oil import bill. However, there will be some relief as the new refineries may reduce imports of refined petroleum and petro-products drastically. In fact, diesel, India's favourite fossil fuel, is no longer expected to be imported. It is because of this and the fact that exports are doing well that the rupee is holding its own against the dollar, in spite of the burgeoning oil import bill.
With inflation at its lowest, the RBI seems comfortable with the rupee depreciating gradually against the dollar. Says K.R. Bharat, managing director, Credit Suisse First Boston (India), 'Given that inflation has receded and the overall balance of payments is in surplus, the RBI is satisfied with the current level of the rupee. We, therefore, expect at least a one-year plateau for the rupee around the current trading range of Rs 43-Rs 43.50 per dollar.'
Forex experts also point out that the RBI's strategy coincides with an increasing confidence in the Indian currency abroad. The six-month forward premium for the dollar is around 4.5 per cent per annum, about the same as the difference between the libor and short-term interest rates in India. The rupee must depreciate by this rate in a year. If it falls by less, demand for the Indian currency would go up and push up its price. RBI governor Bimal Jalan has also hinted that the rupee won't depreciate beyond 4 per cent over the year. Sources say that while allowing a gradual depreciation, the RBI would step in if the fall gets out of hand. In an election year, the government would not take the risk of a sharp depreciation in the value of the rupee.
In addition to fuelling domestic prices, a weak rupee could by itself become an election issue. Says a forex dealer, 'The economy is now in an orbit. Neither elections nor a Congress or bjp government will be able to push the rupee down beyond Rs 43.60 by the end of the year.' And that belief has gained currency.