Re may weaken on euro woes

The rupee is expected to fall as the dollar gains on account of downgrade in Spain’s sovereign ratings.

“Spain’s downgrade will be the major factor affecting the rupee this week,” said K Ramanathan, chief investment officer, ING Investment Management. The euro declined 2.4% this week to $1.2273 from $1.2570 on May 21, after gaining 1.7%. “The dollar is now expected to open stronger on Monday,” said Dhaval Shah, team lead, technical analysis, Asit C Mehta Investments.

Fitch Ratings last week downgraded Spain’s credit rating one notch from its AAA status. It expects Spain’s rate of economic growth to materially reduce over the medium term as the country adjusts to a lower level of debt. Fitch said an inflexible labour market and a restructuring of regional and local savings banks will hamper the pace of adjustment in Spain.

This is likely to have an impact on the Indian equity markets as well. “The equity markets, though recovered, will see some pressure from the Spain downgrade this week,” said Ramanathan. The Bombay Stock Exchange’s 30-share Sensex opened last week at 16,495. It posted a weekly gain of 2.45% or 417.45 points, its best in nearly three months.

Last week, the rupee ended stronger by 94 paise against the dollar to end at a one-week high, tracking local shares, which ended up due to inflows from foreign institutional investors (FIIs). Dealers said FII inflows into the Indian Depository Receipts of Standard Chartered Bank and inflows linked to the 3G spectrum auction helped the Indian currency. The unit ended at Rs 46.3500 per dollar on Friday, compared with Rs 47.2900 per dollar on Wednesday.

On Thursday, the market in Mumbai was closed on the occasion of Buddha Purnima. “Last week was very volatile, we saw 70 paise movement in the rupee in just two days,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai. He expects the rupee to trade in a range from Rs 45.50 to Rs 47 per dollar next week.

“What we saw last week was just a correction when the euro gained on China’s announcement,” said Abhishek Goenka, chief executive officer, India Forex Advisors.

China had announced last week that it would maintain part of its foreign reserve in Eurozone bonds. That helped the euro appreciate against the dollar, which in turn augured well for the Indian unit. “We see the rupee trading between Rs 46.5 and 47.2 per dollar this week, but there are chances that it may go down to Rs 47.5 per dollar in a couple of weeks,” said Goenka.

After the sovereign downgrade, the uncertainties over the Eurozone crisis have intensified even further. “Risk aversion and nervousness around the globe has not subsided and the trend of the dollar strengthening will continue for a few weeks,” said Goenka.

Jagannadham Thunuguntla, chief strategist, SMC Capitals, said: “Till the global scenario is addressed in a meaningful way, I think we will see a market where the dollar continues to strengthen against the other currencies and hence, against the rupee too.”
Gonsalves of Mecklai & Mecklai said, “If the non-deliverable forwards market shows bigger arbitrage after rupee opens weaker on Monday, then dollar will move up further, may be even to Rs 47 per dollar levels.” Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars rather than the local currency.

The 3G auction payments may also have an impact on the rupee. “Most of the Indian companies have raised funds locally but there are talks in the market that they might sell off the greenback to meet their requirements,” said Gonsalves. Dealers said that dollar sales from exporters may also augur well for the local currency, but that demand for the US unit from oil companies and other importers may limit the rupee’s rise. (With agency inputs)