The Telegraph
Since 1st March, 1999
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Tug-of-war over rupee trend

New Delhi, July 16: Policy makers are in a dilemma over whether to allow the rupee to weaken further against the dollar or arrest its fall and strengthen it instead.

Sections within the government favour forcing the rupee, which has been steadily weakening, to appreciate somewhat to help take care of the rising oil bill.

However, commerce ministry mandarins feel the rupee should be allowed to weaken further against the greenback, pushing it closer to the 46.75-mark, to help exporters, especially business process outsourcing firms.

The rupee has been weakening partly because of rising oil prices, which have hit $78 a barrel, and partly because of the rising current account deficit, which will be around 1.5 per cent of GDP this year.

Moreover, narrowing interest rate differentials with the US markets and expectations that the Fed would raise rates have seen many firms sucking out dollars from Asian markets in favour of the US.

The Institute of Economic Growth, the government’s principal economic think tank, says if the trends of “widening trade gap and strengthening of US dollar” continue, the rupee would depreciate further in the coming months.

Allowing the rupee to weaken has always been a partially deliberate move aimed at helping exporters compete against Southeast Asian and east Asian rivals. However, the government is now concerned over the continuous fall of the rupee.

Foreign investment on Indian bourses has protected the rupee for most of last fiscal, but with the stock markets taking a tumble in recent months, there has been a net outflow of dollars from FIIs. The bourses attracted nearly $5 billion in net investment between January and early May, but the amount has nearly halved since then after the markets crashed. With oil prices rising, the dollar demand is expected to accelerate. As a result, the rupee is expected to weaken further.

A section of policy makers, however, feels it necessary to pull up the rupee to meet the country’s rapidly rising import bill.

A rise in rupee value will also keep inflation at bay, earning positive points for the government. They prefer guiding the rupee gradually up towards 45-46 against the dollar.

A continuous rupee depreciation is widening the country’s trade deficit, which is likely to hit $70 billion by the end of 2006-07.

Oil imports alone are expected to touch $50 billion.

Traditionally, there are two ways to strengthen the rupee ' by making the RBI and select state-run banks sell dollars and by raising interest rates, especially those of foreign currency deposits held by domestic banks to attract dollar inflows.

Both the moves could be shored up by taking steps to make India a more attractive destination for foreign investment inflows.

“A stronger rupee will help reduce the rapidly increasing import bill in domestic currency terms. But a falling rupee has its advantages too,” said finance ministry officials. The North Block has been in constant touch with the Reserve Bank on the rupee situation.

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