Dollar may start appreciating by next month, say analysts
Ankita Chokhani 05 October 2010

The Indian rupee is expected to appreciate to around 44.15 against the dollar as there will be foreign inflows till mid-October and then foreign investors are expected to exit the markets in early November, boosting the greenback

The rupee's rise from 46.69 in June 2010 to 44.68 on 1st October 2010 against the greenback has put huge pressure on merchandise exporters and information technology (IT) companies while foreign investors are witnessing a nice pop on their investments.

A stronger rupee eventually means Indian goods and services will be less competitive in the main export markets. But a stronger rupee is bringing in more portfolio investment, in turn making the rupee even stronger. The belief is widespread that the rupee is set to continue to keep rising. However, according to analysts, this would be short-lived. By next month, the dollar is likely to start appreciating.

Jamal Mecklai, chief executive, Mecklai Financial, a top forex advisory firm told Moneylife: "The current trade account deficit is high and the net inflow of capital is high so the rupee is appreciating. The last burst is probably related to the fact that overseas people are ready to buy in public sector initial public offerings (IPOs)".

 The Indian rupee touched its five-month high of 44.38 to the dollar on 4 October 2010. The strong foreign investment inflows have contributed to the rupee appreciation even though governments around the world are trying to keep their currencies weaker as a weak dollar has eroded the competitiveness of their exports.

"The rupee is expected to appreciate to around 44.15 before the prices of the dollar start moving up. Also little volatility is expected till the RBI policy is out in the first week of November," said Jigar Pandit, assistant vice president, Sharekhan.

There have been estimates saying that the Indian rupee is expected to appreciate to around 44.15 against the dollar as there will be foreign inflows till mid-October and then the rupee would weaken as foreign investors reduce their inflows and book profits from early November. 

KV Ramesh, treasury head at Lakshmi Vilas Bank said, "Strong foreign inflows are expected to continue till the last week of October."

The Indian equity market has enjoyed an extraordinary run-up in the past 33 months. There has been a net equity inflow of $19.2 billion, above last year's $17.5 billion between Jan 2009-Dec 2009. The Sensex witnessed a 13% rise from 17,971 on 31 August 2010 to 20,706 on 4 October 2010.

India's current account deficit widened in the June quarter compared to the earlier quarter due to lower earnings through services and higher merchandise trade gap, keeping up with the prevailing market sentiments.

Citigroup Global Markets Ltd, in a research note said, "We maintain our view of a marginally appreciating currency based on our estimate of the current account deficit at 2.2% of GDP and capital inflows being more than sufficient to finance the deficit."

If the rupee continues to appreciate, IT companies will get edgy as their bulk transactions happen in the dollar. Though they have increasing revenue, their net realisation and profit margins are being adversely affected due to the dollar depreciation.

Sharekhan in a note mentioned that at the end of Q2FY2011 cross-currencies have moved favourably for Infosys Technologies and the IT sector as a whole. "Infosys has taken 46.5 for Indian rupee/US dollar conversion for Q2FY2011 and FY2011 whereas the quarter end rate was at Rs44.57 which indicates a 4% decline in the conversion rate. Thus going from the second half of FY2011 it would imply a 2% decline from the earlier conversion rate," the brokerage added.

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