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Rupee in for testing times, stability depends on RIBs' success

The fallout of a run on major Asian currencies could affect the Indian rupee in the next fortnight. The only stabilising factor could be the success, if any, of the Resurgent India Bonds, a State Bank of India scheme for non-resident Indians.

Prime Minister Atal Bihari Vajpayee, making his maiden speech from the ramparts of the Red Fort in New Delhi on August 15, the country's 51st Independence anniversary, has appealed to NRIs to contribute generously to the RIBs. So far more than Rs 50 billion have been subscribed by the NRIs in this bond scheme.

The Indian rupee breached 43 and touched an all-time low of Rs 43.35 in the intra-day trading on August 12 against the US dollar due to the Japanese yen crashes and other Asian currencies following suit, which reflected in the Indian market during the end of first fortnight, according to an I-Sec report.

The Japanese yen has been under pressure throughout the fortnight and this has resulted in high volatility in most of the Asian currencies. Owing to fears of China devaluing the renminbi (yuan) and pressure on the Hong Kong peg dominated Asian recession, currencies are likely to continue to be under pressure for next couple of weeks.

After touching an all-time low of Rs 43.35 during the intra-day trading on August 12, the Reserve Bank of India intervened which resulted in a recovery to Rs 43.10 level.

However, the market is very volatile and another run of the rupee cannot be ruled out, the report said.

The forward premia rates have also tightened. Six-month forwards were quoting at 8.7 per cent on August 14 compared to an average of 7.4 per cent in the first week. Non-delivery forward spreads over on-shore forwards have also widened, six month premia were around 13 per cent.

The Asian yankee bonds also fell sharply during the fortnight. Indonesia had to reschedule a sovereign loan and amidst market fears of a default, the spreads over the US treasury have touched triple digits. India has escaped the carnage and ICICI 2007 has been fairly steady, though on thin volumes.

Trade deficit has widened in the first quarter to Rs 82.4 billion from Rs 81.4 billion in the corresponding period last year. Trade was affected in April 1997 due to a 10-day truckers' strike and again in June 1998 as the country's leading port Kandla was blocked after a cyclone. The imports in April and May 1998 were likely to be abnormally high ahead of the Union Budget as tariff hikes were widely expected. Non-oil imports rose by 14.7 per cent, while oil imports declined 35.9 per cent in value terms as a result of lower global oil prices, the report added.

The government's borrowing programme has been completed to the extent of Rs 37.7 billion. Budgeted gross borrowing programme was Rs 79.3 billion, completed as on July 31 was Rs 54.4 billion of which monetised was Rs 14.1 billion, remaining part of the programme was Rs 24.9 billion, expected SDL issue was Rs 50 billion and total outflow was Rs 29.9 billion.

The projected inflows are: redemption of dated securities 8,143 coupons on dated securities Rs 15.7 billion, redemption of 364-day Treasury Bills Rs 61.7 billion, redemption of SDL Rs 14.14 billion and coupons on SDL Rs 37.08 billion, total inflow Rs 352.23 billion. The net surplus is about Rs 50 billion.

With deposit accretion estimated at about Rs 650 billion for the remaining part of the fiscal year, overall liquidity appears comfortable to fund any overshooting of the planned fiscal deficit as well as commercial credit demand.

The call money interest rate tightened near 7 per cent following volatility in forex market. The liquidity in the system continues to be comfortable and Rs 20.01 billion was outstanding in repos with the RBI on August 14. Market sentiment is likely to be positive with inflows from the proceeds of RIBs.

In the open market operations, about Rs 12.35 billion of 11.95 per cent 2004 security and Rs 8.41 billion of Rs 11.9 per cent 2007 security were offered in the RBI's sale list.

The yield curve shifted downward during the fortnight, moving about 15 basic points at the short end and five basis points at the long end. Trading volumes picked up, averaging Rs 7.05 billion per day in dated securities compared to Rs 3.89 billion last fortnight, the I-Sec's report added.

UNI