Rupee, forex reserves may face more pressure

On the other hand, the rupee may also face pressure against the dollar as the cluttered economic horizon is likely to force the corporate sector to take foreign exchange cover and safeguard its position. Over $ 500 million was already spent last week — when the rupee fell by almost one unit to 45.67 — after India conducted the nuclear tests and the US and othernations reacted by imposing sanctions and freezing loan assistance. As a result, forex exchange reserves had come down from $ 29.12 to $ 28.66 last week.

“If dollar inflows come down, naturally the rupee will become weak against the dollar. A good forex inflow will always keep rupee strong,” said a dealer, adding, “I expect the rupee to fall below the 41 level against the dollar shortly.”

When the rupee dropped to an all-time low of 40.77 on May 14 — when fears of a slowdown in capital inflows and spurt in the forward premium on six-month dollar to 11 per cent per annum played havoc in the forex market — the Reserve Bank of India (RBI) kept away from any direct intervention. Whenever the rupee showed signs extreme weakness last weak, State Bank of India was selling dollars in the market to prop up the value of the rupee.If the rupee crosses the 41 level against the dollar, the RBI is likely to enter the scene and intervene directly. “However, the RBI intervention can help only to some extent. Itcan not go beyond a point as the forex level will be depleted by any massive intervention. Currently, India needs good forex position to take care of any outflow of money through other channels,” said a source.

Another option for the RBI is to make structural changes in the policy by raising cash reserve ratio (CRR) and imposing other curbs. But it will be a reversal of policies again as the RBI had only recently lifted such curbs imposed — to normalise the forex market — in the beginning of the year. This will, however, lead to a rise in interest rates. While changing the outlook for India from `stable’ to `negative’, S&P had said, “India’s balance of payments could come under increased strain in the medium term from reduced inflow of both official and private capital.” S&P also fears that reduced access to concessional loans (which now comprise nearly 43 per cent of the country’s external debt) will increase the country’s dependence on higher cost private funding.

The immediate casualty may bestate-owned Power Finance Corporation which has planned to raise $ 100 million through a syndicated loan. “The recent development may push up the coupon rate (interest rate) on the loan,” bankers said. Moreover, plans of many other corporates to come out with GDR issues and external commercial borrowings (ECBs) will not materialise in the near future. In fact, there was no GDR issue from India in the last six months. The inflow of FII investment to the stock markets is also likely to come down as many FIIs (they had brought in over $ 8 billion in the last four years) allot funds based on the country risk.

In fact, there is also a possibility of some FIIs even pulling out money. “Much will depend on the budget. S&P could have waited till the government announced the budget,” said Ramu Deora, president, FIEO, a leading exporters’ body. However, experts rule out any crisis like 1991-92 when the country encountered a massive capital flight. As one banker said, Indian economy is much stronger now and theseare only short-term turbulences.