The rupee remained volatile in the fortnight ended 4 March 2005 with the intervention from the Reserve Bank of India (RBI) capping its gains at every rise. It lost 1.27% on the central bank-triggered fall, from a five-year intra-day high of 43.30 on 3 February to a six-week closing low of 43.8300/8500 on 18 February.

The Indian currency touched a five-year closing high of 43.4000/4200 on 2 February on upbeat sentiments after Standard & Poor’s (S&P) raised India’s long-term foreign currency rating by a notch to ‘BB+’, and affirmed its ‘BB+’ long-term local currency and short-term ratings on 2 February. The upgrade on the foreign currency reflects India’s improved external position and growth prospects. However, the rating it is still one notch below investment grade.

The rupee commenced the fortnight on 21 February on a weak note at 43.8350/8450, slightly changed from its previous (18 February) six-week closing low of 43.8300/8500. It ended the fortnight (on 4 March) on a firm note at 43.7500/7600.

The rupee gained ground on strong foreign portfolio investment into the domestic stock market and rising speculation of revaluation of the Chinese yuan. Robust Q3 earnings, the government’s decision to allow private pension funds to invest up to 5% of their portfolios in the stock market and a deft budget boosted foreign fund inflow, which saw the BSE Sensex touching an all-time high of 6,864.62 points before settling at 6,849.48 on 4 March.

There was a marked increase in foreign portfolio investment post budget, as the pre-budget uncertainty prevailing in the market subsided. With corporate tax reduced to 30% and peak customs duty cut to 15%, the Union Budget 2005-06 has been hailed as following a path of growth and reforms. February registered an FII inflow of Rs 8376.30 crore – a record monthly inflow.

Firm economic data also supported the rupee’s gain. The Indian economy is estimated to grow at 7% this fiscal, while exports showed a robust performance, growing by 33% in January 2005. India’s exports in the first 10 months of FY 2005, between April 2004 and January 2005, rose 26%.

The rupee touched an intra-day high of 43.6600 on 22 February over the greenback’s weakness against the euro and other global currencies. The US dollar weakened due to the decision of major central banks to diversify their reserves out of dollar assets. The central bank of South Korea stated that it would diversify its reserves into a larger variety of currencies. Consequently, the dollar fell across the board, plunging to seven-year lows against the Korean won and 22-year lows against the New Zealand dollar.

The Indian currency, however, lost its steam on the greenback’s turnaround against other currencies amid anticipation of more Fed rate hikes and increase in crude prices. The US dollar regained its strength against the euro and the yen following South Korea’s stand that long-term plans to diversify did not indicate selling the US dollar.

Crude prices zoomed to breach US$ 50 per barrel on Opec’s indication that it might resort to a production cut in its March meeting at Iran and cold weather in US increasing pressure on demand. At NYMEX, the US light crude oil for April delivery was quoted at US$ 53.48 per barrel in Asian trades on 4 March.

On budget day (28 February), the rupee closed at 43.6750/6850, marked by purchase of dollars by public sector banks (on behalf of RBI), trimming the Indian currency’s gains from an intra-day high of 43.6100.

The rupee could not sustain its initial strength and lost momentum in the second week of the fortnight. The Indian currency remained range bound at 43.7000/43.7200 and closed the fortnight (on 4 March) at 43.7500/7600 much lower compared to its previous close of 43.7000/7100.

The gains attained due to heavy foreign inflows pouring into the upbeat stock market were overshadowed by RBI’s intervention. Sustained dollar purchases by public sector banks came amid concern over mounting trade deficit as the central bank feared that this might result in widening the current-account deficit this fiscal. India’s trade deficit increased in the first 10 months of FY2005 on strong imports.

The trade deficit for April-January 2004-05 was estimated at US$ 22687.09 million, higher than the deficit of US$ 13547.94 million in April-January 2003-04. Oil imports in April-January 2004-05, at US$ 23461.21 million, were 40.14% higher than the oil imports of US$ 16741.20 million in the corresponding period last year. Non-oil imports in April-January 2004-05 were estimated at US$ 59980.34 million — 32.71% higher than the imports of US$ 45196.59 million in April-January 2003-04.

India’s foreign exchange reserves increased to US$ 135.66 billion in the week ended 25 February, much higher compared to US$ 132.96 billion recorded in the week ended 18 February. After rising for almost 12 weeks, forex reserves had declined to US$ 129.69 billion in the week ended 10 December 2004 compared to US$ 130.71 billion recorded in the previous week.

The six-month forward premium edged down to 1.71% (on 4 March) as against its previous close of 1.73% (on 3 March).

Outlook: The rupee will continue to remain under pressure as the central bank’s efforts to absorb dollar inflow from foreign funds investing in the country’s booming stock market gathers momentum.