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July 6, 1998


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StanChart survey says rupee will sink further

The rupee will dip lower by December 1998, a Standard Chartered study shows.

The quarterly survey, which touched more than 100 treasurers in eight principal cities, shows that 50 per cent of the respondents expect the rupee to be in the 44-45 range.

They feel a 4 to 6 per cent depreciation is likely because one of the major factors behind the rupee's strength last year -- off shore loan flows -- is likely to dry up. The high cost of hedging coupled with wider spreads on Indian dollar denominated paper are forcing companies to abandon offshore funding plans.

Trade deficits are expected to widen, adding to the downward pressure on the rupee, the survey says.

The survey shows that corporates except the spot rupee's weakness to propagate across the curve, a view consistent with empirical evidence. Around 55 per cent of the treasurers are estimating the six-month forward premiums to stay at 9-11 per cent in December 1998, implying that risk premiums for Indian assets are not expected to diminish soon. Yet, most corporates seem to agree that a successful launch of the SBI's India resurgent bonds -- to net US dollar 2-3 billion from non resident Indians -- could prop up rupee sentiment.

The survey says that the rupee has unsettled India's financial markets. Several foreign equity investors are triggering outflows, while others have taken to the sidelines. The benchmark equity index BSE-30 accordingly has lost a fifth of its value over the past two months. Bond investors are no less bearish.

The government's fresh market borrowings are facing increasing resistance as this week's auction results confirm. The negative sentiment in the asset markets is predictably being reflected in higher risk premiums.

Onshore swap spreads have risen over 300 bps since April-end, to 9.7 per cent, it adds.

The survey pointed several factors behind the recent bout of turbulence in India. Japan's inability to firmly address its domestic problems led to a weaker yen and downward presssure on the currencies of Tiger economies. Global emerging markets like India, South Africa and Chile have not been immune to the knock-on effect of the second wave of East Asia crisis.

The survey says investors in India have had to contend with a string of unfavourable domestic events as well. First, nuclear blasts in May, by attracting sanctions, had the investors concerned about an impending deterioration in the balance of payments position. Then, the annual budget in June was perceived by investors as lacking the necessary reform momentum and inadequate to revive domestic industrial growth.

Moody's harsh two-notch sovereign rating downgrade weakened sentiments further as the rupee reacted to these developments negatively and touched a record low of 43.04 on June 23. However, since then, the rupee had staged a reflexive comeback aided by exporter sales and reassuring official statements.

Yet, domestic corporates with unhedged dollar liabilities/payments see the need to be alert. Foreign investors apart, corporates's perceptions of value and risk will have a significant say in the future trajectory of the rupee, the survey says.


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