The rupee continued its gains against the dollar and breached the psychological barrier of 42 on Monday to close at 41.90/92, a gain of over 62 paise (1.42 per cent) from the previous close. This is the highest level attained by rupee since June 1998, riding on a 5.3 per cent gain since January 1, 2007.
A stronger rupee is expected to impact goods and services exports like infotech and textiles, particularly to the US. However, exports to countries that have pegged their currencies to the euro or the pound sterling will gain from this. And the pressure on the dollar is unlikely to subside at least for a few months, if not years, according to foreign exchange analysts.
The main trigger for the dollar weakness is the weak business sentiment in the US, the survey figures of which were released on Friday. The dollar fell on Monday against several currencies, including the pound, yen and euro. At 5.30 pm, the pound was inching towards $2. The pound was at 1.9914/39, the euro at 1.3551/3576 and the yen at 119.55/66, according to Reuters.
“The rise was basically in the wake of strong foreign currency inflows and Reserve Bank of India keeping away from the market at a time when it is battling inflation,” said Pankaj Sharma, assistant general manager and chief dealer (forex) with Union Bank of India. “The market is expecting the rupee to touch 41 per dollar, if not 40.”
The first tranche of the increased cash reserve ratio (CRR)--coming into force now--has also caused a fresh liquidity constraint, leading to liquidation of dollars. The CRR was hiked in two tranches of 0.25 percentage points each, the first of which came into effect last Friday, while the second will kick in a fortnight later.
Tight liquidity conditions could be seen from the upward spiral in call money rates (overnight rates at which banks borrow from each other) to 13 per cent at one time during trade on Monday.
Taking a cue from Finance Minister P Chidambaram’s comments on Sunday that the rupee was still competitive on the back of strong of foreign currency inflows through direct and portfolio investment, besides NRI inflows, exporters were seen selling dollars, said a chief dealer of a foreign bank who wished not to be identified.
“The market is expecting another CRR hike in the annual review of the credit policy on April 24. So, tight market conditions are expected to continue, leading to dollar sales,” said Nelson Peter Saldanha, vice-president and chief dealer (interbank forex) with ABN Amro Bank.
The RBI has stopped interfering in rupee appreciation in February 2007, when it started attacking inflation. High dollar inflows usually lead to higher money in circulation due to monetisation of the dollars. This, in turn, leads to higher purchasing power and higher demand for goods and services, which fuels inflation.