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May 25, 2000
BUDGET 2000 |
Will history repeat itself?C Girish Summer follows winter and winter follows summer. The laws of nature. And literally everything (well almost everything) in life follows a pattern. The rise and fall of empires - nations in the current context, trade cycles - with their booms & busts, fashions in dressing and tastes in music. All seem to run a full circle. The old adage, "those who forget history are condemned to repeat it'" seems all so apt. Then why should the financial markets be any different? It makes me wonder whether the Indian currency - the rupee - should be any exception. After all, the inexplicable laws of demand and supply (now more and more international in nature) should apply here too. How often have we witnessed a period of prolonged calm after which all hell breaks loose? Listen to the footsteps We have superimposed the trends of the last calendar year 1999, on top of the current years' and have tried to decipher the hidden meanings (if any) - like the Red Indians, who used to keep their ears to the ground to listen to the hoof beats of distant horses. The chart below, shows a distinct trend. The rupee, if it follows last year's trend, will depreciate. Though the spike to an all time low to 44.74 does seem quirky. The dollar-rupee is headed north After the Kargil adventure during the summer of 1999, the Indian rupee had settled nicely and was trading in a broad range between 43.30-43.65 till the end of April 2000. During this time when the capital inflows by way of foreign portfolio and direct investment exceeded almost $ 2.7 billion, the Reserve Bank of India has managed to check the rupee's appreciation by absorbing the excess dollar supplies. The importers have become too complacent over the past many months due to the rupee's stability and were reluctant to hedge long-term liabilities even at an annualised premium below 4 per cent. They were hopeful of the situation to continue as the government announced the extension of RBI Governor, Bimal Jalan's tenure. Is there a case for a weaker rupee? During this passive period for the dollar-rupee, the US dollar continued with its pervasive strengthening over almost all the international currencies. This has caused the rupee to become overvalued against major currencies, curtailing India's export competitiveness and even threatening the domestic Industry with cheaper import prices. To give us an idea of how far the rupee has appreciated against many majors let us look at the following: On September 29, 1999, the Indian rupee ruled at 43.58 per US Dollar, at 45.95 per Euro, at 71.79 per British Pound, at 23.49 per Deutsche Mark and at 28.69 per Swiss Franc. But on May 24, 2000, the Indian currency was ruling at 44.14 per dollar, at 39.91 per Euro, at 64.96 per British Pound, at 20.40 per Deutsche Mark, and at 25.55 per Swiss Franc. In these circumstances it was feared that the authorities might maneuver depreciation in the external value of rupee and the first rumblings were heard during the initial days of May 2000, when the dollar rose and traded consistently above 43.65 and threatened to move past the historical high of 43.70. Today, the rupee was truly shaken as the dollar decisively broke through a host of psychological levels to touch a new peak at 44.74. The rupee however recovered quickly enough towards the end of the trading day as the RBI came out with a statement of measures aimed at controlling the market. But fears and concerns are in one's mind: The reason which most financial media claims for the fall of the rupee, is 'negative sentiment'. To my mind this is sheer nonsense. I concede that night follows day in quick succession, but for summer to turn into gloomy winter, it will take, beg your pardon, a reasonable time. All the silver clouds cannot suddenly have developed dark linings. I personally think that the rupee fall is short lived and the sharpness (spike) is an aberration. But, the fall of the rupee has given rise to many a theory - from the obvious to the ridiculous. I will deal with some of them - either because they are relevant or because they are a good laugh.
So why are people panicking over the rupee? Overall, I feel the rupee will depreciate in a pattern similar to that of the past year - gentle and controlled. The positives in the Indian economy still outweigh the negatives - healthy reserves ($38 bio. at the last count), a pick up in the industrial growth and an encouraging climate for investments. So, hold on! Calm your nerves and keep your assets in rupees! (The author is the assistant vice-president, eMecklai.com) ALSO SEE High inflation, dipping foreign fund inflows maul rupee Rupee closes at record low of 44.29/$
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