Rupee seen weakening 2.4 pc by end-March

Rupee seen weakening 2.4 pc by end-March
REUTERS

MUMBAI, SEP 3: The Indian rupee is expected to weaken by 2.4 per cent from its current level against the dollar by the end of the financial year on March 31, 2001, a Reuters poll showed on Thursday.

Rising global oil prices, slowing capital inflows and a wider trade gap will combine to keep the rupee under pressure, respondents to the poll said.But the depreciation will be much less and far smoother that the volatility which resulted in a decline of five per cent since January, they added. In contrast it lost 2.2 per cent in the whole of 1999.

The poll, conducted among 20 banks, corporates and brokerages, asked the respondents to estimate the rupee's levels at the end of December 2000, March, September and December 2001. The average of the responses saw the rupee at 46.36, 46.92, 47.67 and 48.24 per dollar respectively for each of the dates. The rupee ended at 45.765/775 to a dollar on Thursday.

"We will see volatility and the rate which has been predicted is about five percent depreciation from here to the next year," said Aloke Sharma, head of foreign exchange trading at Bank of America. But corporates, whose bottom lines are more directly affected by the swings in the rupee's rate, saw less volatility.

As a group, corporates were less bearish on the rupee, forecasting an average depreciation of two percent for the rest of the current financial year, compared with an average of 3.2 per cent forecast by banks. "I feel the rupee's depreciation will not be in sudden spurts but in a gradual manner and it will track the REER (Real Effective Exchange Rate) value," said Bharat Doshi, executive director of automobile maker Mahindra and Mahindra Ltd.

INFLATION SEEN TAPERING: The respondents saw inflation rising to 6.64 per cent by December and further to 6.69 per cent by March before declining. "Inflation will initially rise because of the cost push factor caused by higher oil prices," said an analyst at a foreign bank.

Global oil prices are near decade highs and if the trend sustains, analysts expect domestic administered prices of petroleum products to go up. This will add to inflationary pressures. "However, because of the high base effect, inflation will ease in 2001," the analyst said.

Inflation is expected to be 6.55 percent at the end of September and 6.50 per cent at end-December, the poll showed.

BANK RATES SEEN RISING: A majority of the respondents felt the benchmark bank rate will rise but the extent of the rise was likely to be small. The bank rate is the rate at which the central bank lends to commercial banks and primary dealers. It is used as a benchmark by commercial banks to set their Prime lending rates.

Eleven participants expected the bank rate to be hiked by 50 to 100 basis points, while eight saw no change. "The bank rate is a monetary tool which should not be used very frequently and is unlikely to be changed much," said S Anand, treasury head at private sector IDBI Bank, adding that the banks' cash reserve ratio and repo rates were better tools to send out signals to the market.

The RBI last month raised the bank rate to eight per cent from seven percent to prop the rupee. Participants who felt interest rates were set to rise cited a large outstanding borrowing programme and a pick up in demand for credit as the responsible factors.

Central bank directives to exporters to speed up inward remittances of their foreign currency earnings earlier this month have helped improve dollar supply, which has also been aided by increasing foreign fund inflows. Foreigners bought Indian equities for a net of around $ 291 million in August after combined net sales of nearly $550 million in June and July.

The central bank cut key short-term interest rates on two successive days last week, leading traders to interpret the move as signs of increasing confidence pressure on the rupee was abating.