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October 14, 1999

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The Rediff Business Special/Vikram Murarka

Rupee floats in No Man's Land

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Rupee remains a good buy

The rupee is in No-Man's Land. Currently, it is in the range of 43.35-43.50 to the US dollar. There is an equal chance that the Indian unit can either weaken towards 44.00 by March 2000 or strengthen to 43.00 over the same time period. There is, of course, a third possibility that it continues to trade in the 43.30-43.60 range for the next few months.

There are equally convincing arguments in favour of all three possibilities. The table below tells how. Table projects scenarios for rupee movement -- Oct 1999

The technical charts would look aesthetically better if the rupee were to weaken first to 44.00 before it strengthens. Such a movement might even be desirable from the point of view of the long term health of the economy.

The market would want to factor in the heightened danger due to an armed and irresponsible neighbour. It seems the country will have to live with this danger. Whether or not the new government has plans or methods to rid the country of this danger remains to be seen.

General Parvez Musharraf has seen action in the 1965 conflict. He is at the helm of affairs in Pakistan today. He is not a businessman like Nawaz Sharief. To a man who has only a hammer as a tool, every problem is a nail. It might be a trifle na´ve to assume that Pakistan does not pose a greater threat to India today than it did 15 months ago.

It might be prudent to prise in a little more of this risk into all business decisions that will be taken from now on. In terms of the rupee market, it might mean a weakening of the rupee to 44.00. Then again, if the market perceives no danger ahead, then the positive factors that the NDA government is expected to bring into play would take over, and the rupee would strengthen. In any case, the 45.00 level seems distant at this point in time. In the long-term, the rupee ought to strengthen.

The Indian rupee faces uncertain times due to political instability in the subcontinent However, the rupee market also has to deal with the Reserve Bank of India. The central bank seems to think that the only good market is a dead market. For some inscrutable reason, the RBI is not inclined to let the market forces decide the rupee movement.

For instance, the State Bank of India sold dollars heavily at 43.60 on October 5. It is an 'open secret' in the market that the SBI was selling under instructions from the RBI (a standard ploy employed by the RBI to control the market). If the SBI had not been selling, the market would have, in all probability, gone further up to about 43.65.

(Evidence of the RBI's age-old mindset can be seen on its Website homepage where the rates of international currencies [dollar, sterling pound, etc] are still quoted in terms of Rs 100 [so many dollars per Rs 100]. This was the norm in the days prior to the full float of the rupee [circa 1991] when the RBI used to set the official exchange rate for the day, every day, for the market, which the market had to abide by. It matters little to the RBI that the market convention today is to quote the rupee in terms of the dollar [so many rupees to the dollar].)

What is the use of analysing the forex market in India? All one needs is a friend in the RBI dealing room and a telephone hotline to it.

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

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