Rupee depreciation temporary, but inflows still a concern OP Thomas

The rupee depreciated sharply on Wednesday to 40.76 a dollar following the government's new policy on external commercial borrowings that disallowed repatriation of funds homeward.

Bankers said the rupee depreciation was a knee-jerk reaction to the government's announcement and a general feeling that incremental foreign exchange inflows are being moderating, if not nipped.

Exporters took advantage of the situation and entered the market to cover their exposures, said a dealer.

"It is not that the money has stopped coming from today itself, said the dealer at a private bank, though the Reserve Bank of India (RBI) has done a commendable job of managing foreign ECB inflows and domestic overnight rates. These measures have eased the pressure on the central bank to support rupee and moderate domestic rates by accepting reverse repo at six per cent.

The rupee opened at 40.75/76 to the dollar as against the previous day's close of Rs 40.41/42. Most deals were transacted at 40.60/62 levels.

Forward premiums too rose and six-month dollar deals were struck at 1.79% over the spot rate, up 16 basis points from its previous close, while one-year premium was at 1.82% (1.73%).

However, demand from importers was seen only in spot as most expect the rupee to appreciate.

A few bankers were of the view that the rupee could ease to 41 a dollar in the next three months or so but most have, either ruled out this, or at best, foresee a steady currency trend.

"The rupee in fact ended stronger at 40.51/52 and I fear the currency could still appreciate,"' said Parthasarathi Mukherjee, President (treasury), Axis Bank.

"The government's ECB move has addressed only one stream of foreign currency inflows, we are yet to assess the inflows from portfolio equity investments and foreign direct investments,'' he added.

Another treasury head at a government bank feels that the inflows to the equity market is still a cause of concern and could pressure the rupee upwards, especially when the government is targeting a nine-per cent growth rate.

In short, bankers opined that the RBI has taken care of one element (of inflows) and got rid of the interest rate arbitrage benefit corporates encashed on. This implied that corporates will now raise offshore funds only when the requirement is immediate or near term.