Gaining Muscle

Gaining Muscle

Citius, Altius, Fortius' could well be the rallying cry of the rupee as it rises swiftly, touches new highs and becomes stronger against the dollar.

  • November 29, 2010  
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Citius, Altius, Fortius' could well be the rallying cry of the rupee as it rises swiftly, touches new highs and becomes stronger against the dollar. In January this year, the rate of the rupee against the dollar was Rs 46.62.

By 14 October, it had risen by 5.4 per cent to close at Rs 44.10 against the dollar. The last time it was near this level was in August 2008. Will the rupee's growth be beneficial for us? Is it a harbinger of good times or ominous ones? This will depend on which side of the fence you are.

For consumers, it's time to cheer as the price of imported goods falls when the rupee rises. So trawl the Net, look for good deals marked in US dollars and snap them up. You will now have to pay fewer rupees for the same dollar. It's also an opportune time to go on that foreign jaunt you have been promising yourself.

"The liberal pricing regime for Ulips has allowed them to be marketed aggressively, compared with mutual funds, which have had caps on loads and expense ratios for several years."
Ashu Suyash,
MD and Country Head,
Fidelity Mutual Fund

The same is true for students planning to enroll in colleges and universities in the US. Not only will air fare be cheaper, even accommodation and fees will be more affordable. However, you don't have to scramble to pack your bags right away.

Analysts expect that the rupee will continue to hover between Rs 43 and Rs 45 in the next few months. In a recent report by Goldman Sachs on the currency market in India, the company has maintained its forecast for the rupee at Rs 43 on a 12-month horizon.

The rupee might already have attained this level had the Reserve Bank of India not intervened. On 14 October, the central bank, after weeks of refusing to enter the foreign exchange market, finally bought the dollar at Rs 44.10. The RBI's move served a dual purpose-minimise the loss to exporters and ease liquidity in the system.

However, an appreciating rupee is watched with dread by exporters as a stronger rupee means less profit for them, which, in turn, means losing out on their competitive pricing edge.

This can lower the earnings of exportoriented businesses such as BPO firms and IT companies. On 14 October, the BSE-IT Index fell by 3.25 per cent, while the decline in the Sensex was 1.82 per cent

However, alarm bells have not begun to ring yet as the rupee is not expected to rise to the Rs 39 level that it had reached in 2007. This is because the government is more vigilant about the money being invested by foreign institutional investors (FIIs), who seem to be making a beeline for the Indian equity and debt markets.

Dejected by the paucity of investment opportunities in the US and European countries, they have been flocking to the great Indian stock sale. From January this year till 18 October, FIIs had invested about Rs 1,60,000 crore in equities and debt instruments, which is a record. The figure is likely to go up further as the US Federal Reserve is expected to buy assets worth $1 trillion from its financial institutions, which could further weaken the dollar index.

"Today, India is best placed among the emerging markets considering that it offers a large interest differential and strong growth momentum, making it a hot investment destination," says Naveen Mathur, associate director, commodities and currencies, Angel Broking. India's closest competitor, China, has been witnessing some resistance in inflows mainly because of the scepticism on its currency.