Talking the rupee up

The rupee finally pierced through the 46 level to 45.95 against the dollar on last Thursday. With this, the rupee has risen by a whopping 4....

The rupee finally pierced through the 46 level to 45.95 against the dollar on last Thursday. With this, the rupee has risen by a whopping 4.4 per cent or 204 paise in the calendar year of 2003 and 6.8 per cent 312 paise from the low of 49.08 recorded in May last year.

Why is the rupee rising continuously? The answer is very simple: more and more dollars are coming into the country. It can be through ADR American Depository Receipts issues by Indian companies, non-resident Indians bringing in more funds or foreign funds investing more in Indian stocks. In theory, this appears fine but not in practice.

The impact is already visible: foreign exchange reserves have touched 85 billion and the 100-billion mark is not far away. 8220;But the Reserve Bank of India is not mopping up the entire flow of dollars from the market. Otherwise the rupee wouldn8217;t have risen so fast. This may be because other foreign currencies 8212; especially Asian currencies 8212; are also appreciating against the dollar,8221; said a dealer. The RBI uses its huge dollar chest to regulate the value of the rupee. When it wants the rupee to fall, the RBI sells dollars from its coffers and buys dollars to strengthen the rupee.

WHO8217;S SENDING DOLLARS?

Rupee almost fully convertible

Though officially rupee is not fully convertible on the capital account which will allow free inflow and outflow of foreign currencies, we8217;re almost there. Thanks to the huge foreign exchange reserves, the RBI has relaxed many controls on release of forex. It allowed release of up to one lakh dollars in many cases. Indians are also allowed to use credit card abroad. But to make the rupee full convertible, India will have to bring down fiscal deficit and get sufficient trade surplus. Inflation rate 8212; another condition 8212;is already at a stable level. India made the rupee convertible on the trade account for exportersnearly six years ago.

The interest rates in the US and other European countries have fallen steeply to one and two per cent levels. On the other hand, interest rates have not fallen much in India. A one-year term deposit in India still gives 5.5 to 6 per cent. 8220;It makes sense for NRIs to send their money to India under various foreign currency accounts. They have been sending a huge amount of dollars to India to take advantage of the rate difference arbitrage,8221; said a banker. Economist Surjit Bhalla termed this inflow of money as 8216;scam savings8217; to take advantage of the interest rate mismatch. Seeing the inflow of NRI money, the RBI last month put a limit on the interest rate on FCNR accounts. The inflow through this route dipped by nearly 40 per cent since then. Is it NRI money alone? Bankers suspect the funds held by resident Indians abroad are also coming back in the form of NRI inflow and foreign institutional investment FII. The reason is high interest rate in India. FIIs have invested over 1.34 billion in India in the last three months.

Market sources say that one-third of this amount was brought in hedge funds whose source of funds is mysterious which make risky investments. RBI or market regulator Sebi don8217;t have any clue of the source of funds of these investors. Marketmen are now speculating if money of Indians is coming back in the form of FII investment.

COST OF DOLLAR INFLOW

Exporters and companies which focus on exports will find their earnings coming down. But they won8217;t lose any export market as the currencies of India8217;s competitors are also appreciating. Infotech companies, which earns foreign exchange, will be affected by the appreciating rupee. A team of industrialists led by the Confederation of Indian Industry president Anand Mahindra rushed to the RBI and lobbied for more active RBI intervention 8212;ie, buy more dollars from the market and prevent rupee appreciation 8212; recently. Mahindra and his CII team were obviously concerned about the rupee8217;s recent gains. 8220;Industrialists should be lobbying for a cut in interest rates here. False invoices are being created to derive two kinds of benefits. One is to collect the duty drawback and other is to bring foreign funds into India for earning six per cent more interest rate than in the US,8221; Bhalla said.

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But for the RBI, it8217;s a delicate situation 8212; a case for a suitable balancing act. 8220;It cannot afford to act in a knee-jerk fashion. RBI is doing a fine job now,8221;said a forex market dealer. The RBI will have to think about ways to get a good return on its dollar reserves. As it8217;s investing its reserves in treasury bonds abroad,the fall in interest rates abroad will impact the cost of maintaining the dollar reserves. The big question mark is: how far India should allow this inflow of scam savings?