The rupee ended 2002 with a flourish on Tuesday, posting its first annual rise in 10 years, and is seen extending gains in the New Year, analysts said.
The rupee ended at 47.9825 per dollar, just off its 12-month closing high of 47.9375/9400 notched the previous day. It rose 0.55 per cent against the dollar in 2002.
"Against a backdrop of a globally weakening dollar and huge investment and trade inflows, the rupee was bound to rise," said U Venkataraman, head of forex and money markets at IDBI Bank Ltd. "It should now continue to gain further."
The greenback's slide had also diluted the impact of the recent advances in the prices of oil, India's biggest import.
"The only negative factor against the rupee's rise so far had been oil prices since it is the single largest component in our import bill," said Venkataraman.
India's central bank has had to balance the dollar flows with the interests of its exporters.
Exports, one of the key factors behind the rupee's gains this year, grew by a cracking 13.7 per cent in the first seven months of the current year to March 2003.
But analysts said the central bank moves to protect export competitiveness had been measured because it was keen to take the Indian unit closer to a free float.
"Even the central bank's intervention has been calibrated and they have not aggressively intervened to keep the rupee at a particular level at all costs," a trader at a private bank said.
The Indian unit had ended 2001 at 48.2450/2500 and has always weakened against the dollar by an average of three to four per cent year-on-year in the past 10 years.
Software exporters impacted
India's software services exports, a rapidly growing and significant component of India's hard currency earnings, were likely to be impacted by the rupee's appreciation.
"Yes, the rupee's appreciation does certainly have an impact especially on our costing," said Ashank Desai, chairman and chief executive of Mastek Ltd, a mid-sized software exporter.
India has a half-a-million strong army of low-cost and high-quality software engineers who have helped the sector's exports grow by a sizzling 50 per cent in the late 1990s.
"But at the same time it no longer has the kind of impact that it would have had about six or seven years ago when the cheap rupee was a big component of our costing since most Indian firms have now matured and moved up the value chain."
Analysts said growth in software and other services exports was now likely to help prop the rupee, fully convertible only on the current account, up even further.
"The current account surplus is widening because of an increase in service exports, which have been spectacularly strong and are beginning to contribute very significantly to the current account," said P K Basu, regional economist at CSFB, Singapore.
"Consequently, there will continue to be upward pressure on the currency and I expect the rupee to stay stable to strong against the dollar in the next three to six months."
Latest data released on Tuesday showed India's balance of payments surplus in the September quarter had surged to $4.925 billion from $483 million a year ago.
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