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Rupee could slip to 43.80 to US $ by March

Vikram Murarka in Calcutta

The spot rupee has weakened on Friday, trading as low as Rs 43.65/43.66 to US $. The State Bank of India is reported to have been buying since the rupee touched Rs 43.60.

Today it slipped further to 43.64 in intra-day trading.

Why is the rupee weakening? India's average monthly trade deficit is now in the region of $ 1 billion and is likely to remain so in the months ahead. Oil prices are rising and will continue to rise over the next six months. The savings in oil import bill which will accrue from additional refining capacity (such as Reliance Petrochemicals) could be eroded by higher crude prices coupled with increased demand on the back of better industrial performance. The BSE Sensex, leading indicator of the rupee, is on the last legs of the upswing which started from near 2,800 in the last quarter of 1998.

So far, the market has been contained at 5,600 and this is the time to book profits on earlier purchases. The FIIs, who have proved to be very savvy over the past 12 months, can be expected to sell. The Dow Jones is unable to break above significant resistance at 11,600 and only the Nasdaq index is going up, something which is unnatural and calls for a correction.

With premia having fallen to as low as 3.21 per cent even for 12 months, it makes a lot of sense to cover imports. With exporters no longer being able to derive any benefits from the forward premia (high premia are good for exporters), the RBI may feel obliged to compensate them with a weaker rupee.

All in all, the stage seems to be set for a March-end level of Rs 43.80 to US $, provided the RBI does not keep the rupee value artificially high.

PS: (The rupee closed today at an all-time low of 43.6150 to a US $. The immediate cause, newswires said, was tension on the Indo-Pakistan border.)

The writer is director, Kshitij Consultancy Services, and a Calcutta-based forex analyst.

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