Re rise imminent on strong macro figures, say experts

Re rise imminent on strong macro figures, say experts
The Economic Times, November 30, 2009, Page 9

Anto Antony NEW DELHI

WITH interest rates ruling near zero in most of the developed world, investors’ search for higher returns has seen hoards of them rushing to emerging markets, triggering a sharp appreciation in currencies and stock prices.

Although the rupee had slipped marginally to Rs 46.56/$ on Friday as foreign institutional investors (FIIs) took money out of Indian markets due to jitters following the Dubai crisis, it is expected to strengthen in medium term. “The markets are likely to get over the nervousness by the end of the week and appreciation of rupee is expected to continue due to strong macro fundamentals like growth and low balance of payments,” said Ananth Narayan, head of Standard Chartered’s money market operation in South Asia.

FII inflows into the country in the calendar year till November have crossed $16 billion, compared with the annual inflow of $20 billion seen in 2007. The year 2008 saw foreign institutions turning net sellers to the tune of $9.36 billion.

Further strengthening of the Asian currencies would also depend on their dependence on exports, as Asian central banks of export-reliant economies have repeatedly intervened to check appreciation to maintain export competitiveness.

Forex market-makers points out that India’s strong fundamentals and narrowing trade deficit is lending solid footing to country’s currency. Movement in eurodollar currency pair — euro has been appreciating against dollar — is also lending traction to the rupee.

The United States is, however, trying to talk the dollar up. “We recognise of course that given the very important role of US in the global economy, the important role the dollar plays in the system, that we bear a special responsibility for being a source of stability and strength for the global economy,” US Treasury Secretary Timothy Geithner told a press conference in Singapore a fortnight ago after a meeting of Asia-Pacific finance ministers.

A negative growth surprise in India, imposition of capital inflow measures in the emerging economies, or a growth surprise in the US could compel the Federal Reserve to tighten the interest rates suddenly checking rupee appreciation. China adopting a flexible currency regime could give the regional currencies a leg up. “The revaluation of Chinese yuan against the dollar is expected, but the timing and extent of appreciation is not clear. This move will trigger a rally in other Asian currencies against dollar including rupee. Given the negative outlook for dollar in the near term with EUR/USD target at 1.55, further rupee appreciation is just a matter of time,” said J Moses Harding, Head of Global Markets Group at Indus Ind Bank said.

Medium and large size exporters with strong treasuries in place are expected to survive this patch of depreciating dollar. Medium-sized Mumbai-based textile exporter Alok industries, which will exports goods worth close to Rs 1,500 crore this year, is confident of coming out unscathed from the depreciating dollar.

According to Alok CFO Sunil Khandelwal, companies that has been importing from India or other manufacturing hubs will not find it viable to change their sourcing model in line with short-term swings in dollar. But the movement in yuan, which is pegged to dollar, remains a matter of concern.

With the Chinese yuan — that moves in tandem with dollar — depreciating against other currencies China could steal demand from other emerging economies.