The rupee was the cynosure of all eyes last week. It gained handsomely or should we say, the dollar lost ground? The rupee hit successive 46-month-and-over lows as the dollar deluge continued unabated. On Friday, the local currency closed at 44.46/48 in the absence of the Reserve Bank of India’s (RBI) intervention to contain its steep rise. The central bank stems the rupee’s gains by buying dollars through state-run banks, in a surrogate manner. It is also known to do so directly if warranted. In volatile trade during the week, the rupee broke through key resistance levels and surpassed the 44.49/50 to the dollar struck on May 29, 2000. The rupee has gained by a massive 78 paise over the past six consecutive trading sessions and has appreciated by more than 2.1 per cent in the current fiscal so far, following a sharp 5.32 per cent rise in 2003. Inflows from foreign funds, chasing $3 bn worth of recent public offerings of shares of state-run firms has been the main driver. Rupee premiums on the forward dollar too ended higher on fresh paying pressure, as importers, banks and corporates rushed to cover their open exposures. Export cancellations also aided the rise in premiums. The benchmark six-month forward dollar premiums payable in September closed Friday at 15/17 paise, higher from 14/15 paise on Thursday. Dollar inflows have been strong with net purchases by foreign funds in the first five sessions of March at close to $200 mn. The same in February and January stood at $790 mn and $535 mn respectively. The story on the bourses has been a major factor driving the rupee to new highs. After a massive fortnightly setback, the Sensex made a remarkable turnaround ending up by 1.57 per cent in the week gone by. There was fresh buying from operators and retailers even as foreign institutional investors (FIIs) made fresh investments on bourses. The BSE benchmark 30-share index that had fallen by 7.43 per cent or 437 points in the preceding two weeks, recovered early losses and even ended the week up at 5,528.94 as against last weekend’s close of 5,443.44, a net gain of 85.50 points. On the National Stock Exchange, the S&P CNX Nifty and the S&P CNX Defty firmed up by 22.40 points and 32.10 points respectively to close the week at 1,747.50 and 1,353.40 from last weekend’s close of 1,725.10 and 1,321.30 respectively. The CNX Nifty Junior concluded the week up by 42.30 points to 3,292.80 from previous weekend’s close of 3,250.50. Sentiment, which was well supported by a strong price rally on Wall Street on Thursday, was buoyed by buying by operators and retailers as well as consistent net purchases by FIIs which made fresh net investments of Rs 942 crore in the first four sessions of the week. The prime factor for the optimistic turn was that of fresh buying support from operators and retailers which not only made fresh commitments in the cash segment but also covered short positions in the futures and options segments as March contract expired on Thursday. Investors also seemed to have taken advantage of lower price levels and built up positions at Friday’s concluding session of the currency financial year. The Nasdaq composite index recorded a rise of 57.69 points or 2.07 per cent, which is the largest daily percentage gain of the year. The decision—if that is what it can be called—by the central bank to let the rupee rise also sparked off a debate in certain quarters whether this marked a policy shift by the authorities. The central bank has for some time now been defending the 45.20 level and after that the 45.15 level by buying dollars through state-run banks. The “let-go” on the rupee front seemed to many a huge shift: as to why allow the rupee to gain by so much when in the past defending levels had been resorted to. The reasoning behind this kind of thinking in the market was also fuelled by the fact with inflation falling, the central bank perhaps did not want to put a brake on this trend by increasing the rupee’s movement in the system. The latest data shows that cheaper fruits, vegetables and edible oil pushed down inflation further to 4.78 per cent for the week ended March 13 despite costlier milk, skimmed milk powder, bread and buns, and baby foods. As a result of the central bank’s dollar sterilisation, money supply growth which was indicated at 14 per cent in the RBI’s October 2003 monetary and credit policy review has shot up to 14.5 per cent. However, Reserve Bank of India’s governor YV Reddy cleared the air when he said that market factors alone decide the rupee’s movement. That inflationary pressures and money supply are not deciding the central bank’s policy. That such linkages should not be woven. RBI deputy governor Rakesh Mohan also reiterated that the recent movement of the rupee against the greenback is because of the inter-play of demand and supply. “Supply of dollar has been good over the last few trading days, and that moved the rupee against the dollar,” he said, adding that there is no change in the policy of the central bank on the exchange rate front. In another important development interlinked with all of the above, the Government of India and the RBI on Thursday signed a memorandum of understanding (MoU) for operational modalities of the market stabilisation scheme (MSS). Furthermore, the central bank also notified on the same day that the revised liquidity adjustment facility (LAF) would come into force from March 29, 2004. MSS instruments will qualify as instruments for statutory liquidity ratio, repos and the liquidity adjustment facility. The scheme would be effective from April 2004. The RBI said these papers will have all the attributes of existing papers and would be issued and serviced like any other marketable dated-stock. As far as LAF goes, the revised scheme will be operationalised through seven-day fixed rate repo conducted daily and overnight fixed rate reverse repo conducted daily on weekdays. The effort is to mop up the excess funds from the inter-bank system. What is the bigger picture? The rupee story will remain the same for sometime to come.
