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Under RBI's full control, rupee steers clear of political turmoil

The Indian rupee's fall against the major world currencies was largely controlled in 1998 by the Reserve Bank of India through various punitive measures which included withdrawal of rebooking facility of cancelled contracts for imports.

The currency depreciated by 8.5 per cent against the US dollar at Rs 42.50, 16 per cent against the deutsche mark at Rs 25.45, 10 per cent against the British pound at Rs 71.15, 22 per cent against the Japanese yen at Rs 36.90 during the year.

This was in contrast to the big slump of other Asian currencies like Malaysian ringgit, the Philippines's peso and Thailand's baht and Indonesian rupiah.

While Indonesian currency weakened by over 100 per cent, other currencies slipped by a range of 15 to 45 per cent against the US dollar during the year.

The six-month annualised premia levels on forward dollars more or less tracked the movement of Indian rupee in spot market as the level moved up as high as 19.40 per cent in January and a low of 6.13 per cent in November as against the year opening level of 7.24 per cent. The premia was quoted at 7.14 per cent on the last trading day of the year.

According to foreign currency analysts, the Indian rupee's steady ride on back of the RBI support would not last more and the currency is likely to come under heavy pressure in early 1999 particularly before the Union Budget presentation due to some crucial economic factors such as falling export earnings, widening gap of trade deficit, huge fiscal deficit and prospect of high interest rates.

More or less, the Indian exchange market had been quite orderly with occasional wild fluctuations amidst a number of negative developments which included US sanctions just after Pokhran blast in May, downgrading by international rating agencies, heavy withdrawal of investment by foreign institutional investors during the year.

Opening at around Rs 39.20 per dollar in early January 1998, rupee came under speculative attack to fall below Rs 40 on January 16 and this provoked the RBI to take tight policy measures including increase in cash reserve ratio by half a percentage point, hike bank rate by two percentage points, increase surcharge on imports and reduce general refinance rate.

The currency swung back to Rs 38.35 from a low of Rs 40.37 per dollar in a couple of days.

However, the measures did not control the rates in money market as well the forward premia. Call money rates zoomed to over 100 per cent while six-month dollar premia shot up to a year's high of 19.40 per cent.

Under the watchful RBI, the rupee thereafter remained range-bound between Rs 39.35 and Rs 39.75 till April and the RBI rolled back the January measures to bring back normalcy to the market.

Close on the heels of the speculators getting cautious because of the fears of the RBI action, came the year's hot news of India's nuclears tests at Pokhran on May 11 and 13 followed by Pakistan's test on May 28. And the Indian currency started losing ground to see the bottom of Rs 43 per dollar on June 23 after India's country ceiling for foreign currency debt was downgraded by Moody's.

The situation became so panicky that Prime Minister A B Vajpayee and Finance Minister Yashwant Sinha had to make public statements in defending a sliding rupee. The statements led to cancellation of large amount of import forward contracts bookings and the currency looked back to a level of Rs 42.48 per dollar on July 31.

But the saga of crisis did not end as the currency was battered by bearish news like worries of Chinese yuan devaluation, Indo-Pak border tensions and instability of the BJP coalition government at the Centre. All these encouraged the speculators to take advantage of the volatile market again and the rupee hit the all-time low of Rs 43.68/70 per dollar on August 20.

The RBI immediately acted to stem the rot and stopped the currency from falling further and imposed a hike in CRR, repo rate, and banned rebooking of cancelled import forward contracts. It also withdrew the facility of splitting of forward commitments into spot and forwards delivery.

This helped the rupee to gain some strength and has been hovering narrowly in the range of Rs 42.50 to Rs 42.70 for the remaining four-month period of the year, notwithstanding the recent development of the US bombing of Iraq.

It closed the year in the range of Rs 42.50-54 per dollar.

The ban on rebooking of cancelled import contract by the RBI was one of the best measures to contain the volatility of the rupee and helped the currency to stabilise, said the chief forex dealer of the Development Credit Bank.

K N Dey, senior vice president of Mecklai Financial Services, said that rupee was under strict control of the RBI all through the year and was not much influenced by the political factors.

The RBI measures, though helpful in keeping the rupee stable, affected the genuine importers interested in going in for forward covers. While exporters were allowed to get maximum benefits from the rupee's stability, importers were not allowed to use the market for forward hedging, Dey observed.

He expressed that such artificial protection of the RBI would not last for long and rupee would come under severe pressure before the budget presentation in February, particularly due to widening gap of trade deficit and growing fiscal deficit.

While macro indicators continue to exert pressure on the rupee, low oil prices and depressed industrial demand are expected to provide some immediate support to rupee.

Analysts felt that as long as the August 20 measures are in force, rupee would be driven primarily by fundamental flows and in case of any shortfall of dollars in the market, it would be relatively easy for the RBI to defend by selling foreign currency reserves (nearly $ 30 billion by this year-end) if required.

It is unlikely that rupee will move in any direction other than that desired by the RBI, they added.

Meanwhile, a recent survey conducted among treasury managers by the Standard Chartered Bank said that the rupee would weaken to a range of Rs 43.50 to Rs 44 per dollar by May next year. The annualised six-month premia would be ranged between 7.5 to 8.5 per cent by February, 1999.

UNI

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