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FINANCE
Dollar Dilemma
Once again, India may run short of foreign exchange reserves
SRIKANTH SRINIVAS
24Oct 2008
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Tough Times:The exchange rate of
the rupee vis-à-vis the dollar is close
to Rs 50 (Pic by Tribhuwan Sharma) |
If you were at a foreign exchange counter at any Indian airport last week, the quoted rates would have shocked you: a little more than Rs 45 if you were to sell them and more than Rs 53 if you wanted to buy. The spread of nearly 18 per cent between the two prices is shocking; usually it ranges around 5 per cent, which is already higher than what a bank would charge you.
That spread indicates the volatility in the exchange rate: on 23 October, as BW went to press, the exchange rate of the rupee vis-à-vis the dollar was perilously close to Rs 50, the highest it has ever been. And to think that less than a year ago, experts and some economists were predicting the price of a dollar at Rs 35.
But exchange rate volatility also raises a set of issues that may have not mattered six months ago. For one thing, no one is certain how much more the rupee will depreciate, and what that will do to corporate India’s prospects.
Second, the spectre of large capital outflows on top of the $12 billion that foreign institutional investors (FIIs) have already taken out of Indian markets raises questions about the quality of the inflows that led to the huge build-up of reserves until March, even May this year.
Third, while India may have the fourth largest reserves in the world, we are also the fifth largest debtor nation — at $221 billion —according to the World Bank’s Global Development Finance 2008 report. Which brings us to an extreme question: in the event of sudden and large reversals, will our current reserves be enough?
How Low Will It Go?
Compared to all other currencies — except the Japanese yen — the rupee has depreciated roughly as much as the pound sterling, the Swiss franc and the euro against the dollar since January this year — all lost about 16-20 per cent. The yen has appreciated against the dollar by about 12 per cent, the reasons for which are not too clear.
“The trend is towards a further depreciation of the rupee,” says Harihar Krishnamurthy, head of treasury at DCB in Mumbai. “But we don’t think it will depreciate by the same rate (20 per cent) that we have seen since January.” It is all about momentum, he says, and sooner or later the downward momentum will have to lose steam.
Many like Krishnamurthy take heart from the ‘fierce and coordinated’ intervention by central banks around the world, including the Reserve Bank of India (RBI). They point to the fall in oil and commodity prices (the Indian crude oil basket is about $62 a barrel right now), which implies that the trade deficit that has widened sharply in the past two months, will do better.
But if the trade deficit narrows because of lower import prices, the fall in exports could drive the deficit wider. Where the balance will be struck will emerge over the coming months, but software exports will suffer from reduced demand; many, including heavyweights such as Infosys Technologies, Tata Consultancy Services and Wipro have sounded lower earnings warnings for the next two quarters.
Many export firms sold their dollar receivables forward at between Rs 41 and Rs 44 when the rupee began depreciating in January. This quarter, their earnings took a further beating when they had to take mark-to-market losses when the rupee depreciated to over Rs 49 against the dollar.
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