For a lot of people in the stock market, the rupee's recent strength translates only to pain for IT stocks. Beyond that , it is not considered particularly material. Incorrect. The currency matters much more to the stock market than people think. For starters, it fuels a virtuous liquidity cycle for the price setters in the Indian market, the FIIs. Any foreign investor will tell you that a very large portion of his India returns this year has come from rupee appreciation. The more it gains, the better the returns, the greater the desire to put more money to work in India; in turn, the greater the flows the sharper the appreciation in the rupee.
So, where is the rupee headed? Most bankers and experts will tell you that the rupee will appreciate versus the dollar. Agreed. Where I think they will be surprised though is in the pace of this appreciation. I do not claim to be a forex expert, but to me the similarities between the Sensex and the rupee are startling. Both seem to have embarked on a multi-year secular bull run and like every analyst is constantly surprised by the pace of rise in the Sensex the currency experts will be forced to continuously reset their rupee targets upwards.
Right now, I do not think any bank has a target beyond 38, that too nudged by the move to 39 in double-quick time. My own feeling is that we will see 32 to the dollar in 2009. I know this sounds aggressive. I base this on two factors. One, we will all be surprised by the extent of capital flows into India over the next couple of years. I am a believer that a mania for Indian assets will happen and this will drive humongous flows through all possible channels. Two, the biggest risk to this forecast is the RBI, but the central bank will be constrained in its ability to defend the rupee by inflationary fears. You cannot fight an adversary as powerful as a dollar rush with one hand tied behind your back. My guess is that the RBI wins small battles from time to time, but loses the war.
The rupee wins. Of course, nothing goes up in a straight line. Like the Sensex is knocking against 19,000 despite corrections as vicious as the one in May 2006, the rupee will have its reversals. Those are, however, not to be mistaken as a breakdown of the trend.
While the rupee's strength has many positive ramifications, it can destroy many parts of the economy. The one that hurts the most in the market today is probably the one which will survive it. The rupee at 32 could wipe out our BPO industry: while there are not many BPO stocks, this has implications for the entire urban consumerism story. For retail, real estate, high-end consumer items. I wonder whether textile and jewellery exporters will survive this currency move. People talk about growth and infrastructure as the challenges, I think the currency will lead a serious churn in the economy over the next few years. Watch it.
(The writer is Executive Editor, CNBC-TV 18)