BOMBAY, 5 April 2004 — More than the surging stock market, or the deluge of Initial Public Offerings (IPOs) or even the politicians getting ready for the polls in April, the biggest newsmaker of the week has undoubtedly been the Indian rupee.

The Indian rupee against the US dollar has been on a roll, having a gala time, much to the glee of Indian importers but to the dismay of Indian exporters, especially software companies and the scores of NRIs making a living, earning dollars abroad. For the NRIs, without any fault of theirs, their pay check has taken a beating.

This week, the rupee breached the Rs.44-mark and went to touch a 47-month high of Rs.43.65, notching an 8.7 percent appreciation in 2003-04 (April-March). The currency has gained about 3.8 percent in the nine sessions since March 18, taking its total appreciation against the dollar in the first quarter of 2004 to 4.7 percent.

Foreign fund inflows and no intervention from the central bank of India, Reserve Bank of India (RBI), led to this free fall of the dollar. RBI may have opted to stay away in order to let a bulk on the strong capital inflows ebb before resuming its intervention aggressively.

Infact as per the latest figures released by RBI, relentless inflows from foreign funds and rising NRI deposits propelled India’s foreign exchange reserves by $26.4 billion in the nine-month period ended December 2003. India’s forex reserves have since risen to a record high of $110 billion on March 19.

Data released by the central bank showed that foreign investments, including portfolio inflows and foreign direct investments, rose to $10.1 billion in the nine months ended Dec. 31, 2003 from $3.1 billion a year earlier. Buoyed by higher returns on rupee assets, NRI deposits increased to $3.5 billion from $2.4 billion in the same period a year earlier.

Over the week, several banks received inquiries from NRIs keen to transfer money from their foreign currency or FCNR (foreign currency non-resident) deposits to NRE (non-resident external) or rupee accounts. NRIs were also examining a premature withdrawal, even though they would lose out on interest. NRIs earning in dollars do not want to miss the opportunity to cash in on a rising rupee.

The interest returns on both the deposits are capped. Foreign currency accounts (FCNR) are capped at 25 basis points below LIBOR, while rupee (NRE) accounts for NRIs are capped at 25 basis points above the benchmark London Inter-bank offered rate (LIBOR). RBI had lowered the caps last year to reduce interest arbitrage by NRIs.

In a weakening dollar scenario, the depositor gets more dollars when the rupee in NRE account is converted back into dollars when the deposit matures. With interest rates falling, several NRIs have also put money in non-resident savings (rupee) account, where the interest return is equivalent to domestic savings account.

Analysts said the rupee’s gain of nearly 9 percent against the dollar in the past fiscal year should be viewed against a backdrop of its weakness against other major currencies. The rupee has weakened by about 3 percent against the euro, by just over 6 percent versus the pound and by about 4.5 percent against the yen in the same period

Forex market dealers explain that the primary reason for the Indian currency to rise is strong dollar inflows ($1.7 billion) from subscription money for the recent flurry of IPOs (particularly ONGC). Secondly the non-interference by RBI and thirdly, minimal supplies from importers ahead of the year-end balance sheet closing.

The government does not seem too perturbed with this fall of the dollar. Infact Finance Minister Jaswant Singh said that the strong rupee was linked to inflation management.

Ashok Lahiri, chief economic adviser managed to bring some semblance into the forex markets when he said that the rupee appreciating was a temporary phenomena and it cannot continue like this forever in a market-determined system.

The positive side to the falling rupee is that it will bring down the import bill due to lower crude prices and as explained by the finance minister and due to the oncoming elections, it will also help tame inflation. On the flip side, it will hit the exporters. The bottomlines of export-oriented corporates is expected to take a beating.

The current outlook is that the rupee is unlikely to weaken over the next year. Infact according to a UBS report, the currency is still undervalued by 2.5 percent and there is room for further appreciation. And remember, this is an election year where political sense supersedes economic pragmatism, so anything can happen. At the moment India is shining but let this shine not blind you.