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RBI has been struggling to work out a way- Where the Indian rupee is heading to

 

Los Angeles, Sep. 03, 2007
Gary Singh

The economist talking about Indian rupee rising and about it’s positive effects- it will shows a better image of Indian markets in global investor’s mind.

When an economy allows foriegn investors to come with their money any time without any restrictions and domestic investors are also allowed to export their money freely thats what is called open capital account.

India has partial open capital account where there is still a cap on funds to be transferred from and brought in the country.

It is a combination of an open capital account,a weak domestic currency and low inflation. No central bank can manage all three of them at the same time

One analyst could easily list out the major mistakes that RBI made.like:

  • RBI didn’t come out with a clear view on fair value of rupee.
  • There was no communication on policy being used by RBI to manage the float.
  • RBI used rising rupee to manage inflation.

We must consider inflation is also the problem untill it is more than 10% as compared to India's economy even 5%. It can put a government out of power.

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Where the Indian rupee is heading to

Sandeep V. Arora
Saturday, September 01, 2007
8:34:39 PM Oman Time

TEN per cent appreciation alone in 2007 has made the Indian rupee Asia’s best-performing currency this year. It strengthened 10 per cent to 40.20 to a dollar from end-2006 on top of a 15 per cent gain in BSE Sensitive Index over the same period. It has oscillated between 40.20 to 41.64 during this time.

The Indian rupee edged higher at 41.05 against dollar on Friday as firmer Asian stock markets raised hopes for renewed fund flows into local shares. Dollar buying by oil importers to meet month-end payments limited the rupee’s rise. It hit a nine-year high of 40.20 on May 29, with foreign buying of local stocks providing support and FDI inflow surges in April-June 2007

Rupee appreciation is the net effect of embarrassment of riches! There is a problem of plenty as FIIs started pumping money in Indian stock market, obviously smelling gains in an economy growing at 8.5 per cent per annum. These are the terms with which finance ministry officials are coming to grip with due to the ever-increasing foreign exchange reserves which have already crossed $229 billion as on August 10 as against China having $1,333 billion and Japan having $924 billion. Mind it, the reserves were less than $1 billion in 1991.

Recent decline

The Indian rupee fell to 41.64, its lowest level in about four months since April 2007, as investors cut exposure to risky assets amid lingering fears of a global credit squeeze. There was a speculation that the rupee will fall to 42 by end of the year. RBI is estimated to have bought $15 billion in intervention between May and June. This was being done to maintain the competitiveness of the Indian exporters. The rupee had touched 48.88 to a dollar on February 25, 2002.

Appreciation: Reasons

One striking feature of economic strength is that its reach in terms of global presence. The total value of the takeover deals by Indian companies was less than $1 billion in 2006. January 2007 alone saw two mega deals; Hindalco/Novelis and Tata Steel/Corus. There have been 72 foreign takeovers by Indian companies worth $24.4 billion in the first four months of this year.

Investment highlights

Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for foreign institutional investors (FIIs).

The number of foreign institutional investors (FIIs) registered with the Securities and Exchange Board of India (Sebi) has now increased to 1,042 in June 2007. In the beginning of calendar year 2006, the figure was 813. Till May 2007, FIIs had pumped in a hefty $6 billion in equities. Last year, during the same period, the FIIs’ exposure to Indian equities was 25 per cent lower at $ 4.5 billion.

FIIs have raised their holding in 540 companies out of top 1,000 companies on the Bombay Stock Exchange (BSE) during September-March (2006-07) period..

CLSA, HSBC, Citigroup and Merrill Lynch have been the most active foreign investors during January 2006 to April 2007. Together they were involved in $4.73 billion worth of trading in shares. Apart from the four FIIs, many others, including Crown Capital, Fidelity, Goldman Sachs, Morgan Stanley, UBS, T Rowe Price International, Capital International and ABN Amro, have taken a significant exposure to Indian equities.

Inflow of dollars

Foreign direct investment (FDI) in India almost trebled to $4.9 billion during the June 2007 quarter from a year earlier on the back of large deals by Vodafone and Matsushita Electric. During January-June 2007, FDI inflows were $11.4 billion, more than three times the $3.6 billion received a year earlier. FDI inflows were $15.7 billion for the fiscal year that ended in March 2007, almost three times the level in 2005/06. The gross FII investments in the country till June from the time they were allowed to invest in the India equity markets stands at $53.06 billion.

NRI deposits

NRI deposits have increased from $17,156 million in 1995 to $39,624 million in 2007.

Balance of payments

N. R. Narayanamurthy of Infosys recently mentioned in an interview that though there is an impact of rupee appreciation on exports yet in a growing economy the country’s strength is reflected by the strength of currency and the respect and acceptance it commands.

Narayanamurthy went on to state that India is a gainer as its imports are larger at $190 billion than exports of $126 billion in 2007. Ramadurai of Tata Consultancy Services (TCS) went on to state that rise of rupee is inevitable in coming period. Earlier there was a case for increasing exports which has now reached $126 billion as on March 2007. However the balance of payments is still tilted towards imports. India imported goods and services worth $190 billion leaving a gap of $64 billion.

Foreign Trade

After the liberalisation programme was launched the exports did leap at 20 per cent per annum for many years from $45 billion at March 2002 to the current level of $126 Billion as of March 2007.

Effect On Employment

Already various export promotion councils and business federations have drawn up plans to counter the effect on competitiveness of Indian products.

It is already reported by the Confederation of Indian Textile industry that 579,000 jobs could be lost in 2007-2008. This could include the direct loss as well loss in dependent ancillaries.

What is the right level?

From time to time senior officials of RBI, Finance Ministry, Commerce Ministry are issuing statements about the relative fundamental strengths of the economy, decline in inflation and a level at which rupee/dollar can operate. Although they are not targeting any specific level the rupee appreciation further is a possibility as the flow to India increases unless the sub-prime problem continues resulting in massive withdrawals by the FII’s.

Conclusion

One key issue that many of the key emerging market economies are facing is the issue of excess forex flows, both because of a current account surplus in most cases, and additional capital flows.

Most of these countries have experienced significant real exchange rate appreciation over the last year or two. India has been managing this complexity relatively successfully within the context of high economic growth, high credit growth, a reasonable degree of price stability and most importantly maintenance of financial stability.

Since there are several factors within and outside the control of financial pundits and the policymakers, the rupee has to adjust in view of the volatile fluctuations of the currencies or the trade scenarios. Sources: http://timesofoman.com/

 

 

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