Treasurers split wide on Re strength

MUMBAI: Rupee’s strength has been the subject of much debate as the currency has risen close to 9% so far this calendar year, helped by strong dollar inflows and the Reserve Bank of India’s reluctance to intervene in the forex market.

Commerce and Industry Minister Kamal Nath on Monday said the rise in rupee was worrying for both exports and manufacturing sector. He said he would soon meet industrialists to find ways to tackle the issue.

Meanwhile, Anil Ambani of Reliance Communication has predicted a stronger rupee at 30-35 per $1.

However, treasurers are divided right through the middle on which way the rupee is going to go by December.

Out of 10 treasury experts DNA Money spoke to, five expect the local currency to hold on to its gains or strengthen further from the current levels by December, while the rest expect it to shed some of its gains in the same period.

Bank of America is the most bullish on the rupee, expecting it to scale to 39 per $1 from Monday’s close of 40.67.

“It’s a tough call, but our economists are predicting a stronger rupee on the back of strong inflows and view that the RBI will not intervene in the market,” said Sanjeev Bajaj, managing director and country treasurer, Bank of America. The apex bank has allowed the rupee to rise more than ever this year for fear that any dollar buying will fuel inflation by adding more money in the banking system.

On the other hand, those who feel the rupee would drop by December feel the apex bank will step in to buy dollars by then as inflation would be under control and hence adding to liquidity would not be that much of a problem.

“RBI will step in to control INR appreciation because otherwise, export growth will take a hit. Mid-cap exporters have already suffered,” said Vikas Agarwal, fixed income and forex strategist, JP Morgan, who expects the rupee to fall to 43 per $1 by December, the most among the ten banks/companies polled.

Exporters will be the number one concern for the RBI when it decides to actively intervene in the forex market.

“Till now, RBI’s moves have been logical, but any rupee appreciation above 40 per $1 will hurt our export competitiveness,” said Prabal Banerjee, group CFO, Hinduja. Banerjee expects the rupee to be around 41 per $1 by December end.

Echoes NS Paramsivam, head of treasury, Essar group: “40 rupees per $1 is crucial in the very short term.” According to him, “The sentiment (for the rupee) is bullish and if 40 breaks then rupee could rise another rupee quickly. But, I think the RBI will buy (dollars) because rupee at 37-38 will hurt sectors like manufacturing, textiles, gems & jewellery and hurt the aim to attain double digit growth.” He does not expect rupee to rise above 40.25 per $1 for now.

Standard Chartered managing director and regional head - global markets, South Asia, Sundeep Bhandari also has his eyes set on the 40/$1 level. He expects rupee to show some strength this week, but start weakening to around 41.50-41.80 per $1 by June and finally to 42.20/$1 by December, by when “the high trade deficit will catch up and monetary policy will be less hawkish because inflation and credit growth will be under control.”

Inflation, though still beyond RBI’s yearly target of 5%, has shown some signs of easing. The most tracked wholesale price index eased to 5.44% in the week ended May 5 from 5.66% the previous week. Expectations are that another 25 basis points hike in the repo rate will be enough to keep a check on inflation.

“A repo rate hike may be coming, but it will not have an impact on the rupee. The rupee may be volatile. It may fall due to factors like RBI intervention, risks on the equity and oil prices and a probable strength in the dollar as the US Fed is unlikely to cut rates. But I expect the rupee to bounce back to 40.50/$1 by December,” said Gaurav Kapoor, senior economist, ABN Amro Bank.