Joel Rebello

Mumbai: After a year of double-digit gains powered by record foreign inflows, the rupee is now showing some signs of weakness.

The domestic currency fell below the psychological 40 rupees per $1 level for the first time since September 19, 2007 on Wednesday pressured by weakness in the local stock market and demand from importers as oil prices touched record levels overnight. The rupee ended at 40.20 per $1 down 0.7% from Tuesday’s close of 39.91 rupees per $1.

From net foreign institutional investor inflows of close to Rs 19,000 crore in September 2007, the first 20 days of February 2008 have seen a net outflow of close to Rs 14,000 crore.

Treasurers expect the rupee to maintain a downward bias for the whole of March. Anindya Dutta, managing director and head capital markets, Calyon Bank, says the present weakness is because of a strong dollar overseas (the greenback has gained 1% against the euro and 2.3% against the pound this month) and also as foreign funds have pulled out of the local stock market.

“The dollar has strengthened because recent economic data from the US has been better than expected. Analysts are predicting a 50 basis point Fed cut in the next meeting, but now expectations are also that Fed may in fact hike rates in March 2009,” Dutta said.

The dollar’s rise abroad has also been in spite of rising crude oil. The US, like India, is a net importer of crude and oil in New York rose to a record $100.1 per barrel on Tuesday.

Dealers sold the rupee on Wednesday as expectations grew that higher oil means domestic oil companies will have to buy more dollars to purchase crude in the international market.

Thinning foreign investor appetite in the local stock market has also been a big contributor in pulling down the rupee after the Indian currency gained a whopping 12% in 2007.

“Foreign portfolio investors pulled out an outsized US$3.5 billion since the start of the year. They were also net sellers in the cash equity market in almost 80% of the sessions this calendar year,” JP Morgan analysts Siddharth Mathur and Vikas Agarwal wrote in a special note on the rupee on Saturday.

JP Morgan has revised expectations on the rupee downwards to 40 rupees per $1 by March end from 38.50 rupees per $1 earlier. Year-end forecasts have also been revised to 38.5 rupees per $1 from 37 rupees per $1 earlier, JP Morgan said noting that “equity market sentiment still remains weak and foreigners continue to liquidate holdings in local stocks.”

However, treasurers see it just as a blip right now. They don’t expect the rupee to weaken below 40.50 rupees per $1 by March end.

“It’s just change in sentiment. The market has realised that there is no major dollar inflows coming. This softness is temporary. Conservatively I think the rupee will end 2008 at 38 rupees per $1,” said P Mukherjee, treasurer, Axis Bank.

Source : DNA