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May 14, 1998


Sanctions may not affect the rupee

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The economic fallout of the nuclear tests conducted by India on May 11 and 13 would not have a serious impact on the value of the rupee, though forward premia will shoot up and remain at higher levels in the near future.

Echoing these sentiments, forex dealers and executives operating in the interbank foreign exchange market expressed confidence over the Reserve Bank of India's 'damage control skills' which would allow the rupee to remain stable even in the event of economic and trade sanctions being imposed on the country.

''The six- month premium will come down within a week's time. The current zoom in forward premia is sentiment-driven as importers and corporates are panicky due to the prevailing uncertainty,'' said Kanji Pitambar and Co partner Gautam Ashra.

The rupee has shown negligible movement in the last two days, mainly on account of selling support extended by the State Bank of India. The forward premia, on the other hand, surged by over 300 basis points to 9.58 per cent during this period.

The rupee has remained firm at the Rs 39.77 level. Dealers opine that the rupee would fall below the psychological level of Rs 40 if the SBI reverses its present position and buys from the market. However, Ashra believes that if the RBI feels that there is pressure building on the Indian currency, it may open a window to pump dollars into the system.

''The RBI will not allow the rupee to weaken. The apex bank has already stated that there is sufficient liquidity in the system,'' he said.

Marketmen believe that sanctions would not affect foreign direct investment and institutional investment in India.

''There are already many American multinationals operating in India. The US, therefore, has business interests in the country. American companies have also made investments in the infrastructure projects in India. Business pressure on Washington will force them to reconsider imposing crippling sanctions as such a measure would jeopardise their interests,'' a foreign banker said, adding that concerted multilateral sanctions would be needed to make an impact felt on the economy.

''Financing of the core sector will be affected. The World Bank and the International Monetary Fund may hold up loans to development projects,'' says Batlivala and Karanis's S Surendranath.

He said that even if there is pressure on the rupee to depreciate, the capital controls would stabilise the situation.

There cannot be a run on the rupee for two reasons, he said. First, the rupee is still not fully convertible on the capital account. Second, the proportion of short-term loans in the external commercial borrowings is still low.

The market can also draw relief from the fact that bilateral aid is less than one per cent of the gross domestic product of India. Japan has vehemently protested the nuclear tests but have suspended grants of just $ 30 million.

''The RBI may defer a cut in the cash reserve ratio to curb the fall in the rupee,'' a senior dealer with a nationalised bank said. He predicted that the the six-month annualised premia would fall back to 6.5 per cent levels.

Dealers said that even though the forwards have shot up, negligible difference exists between the six-month rupee and the rate prevailing in the non-deliverable forward market overseas for a similar maturity. According to them, on Wednesday morning, the six-month rupee was quoted at Rs 41.40, while the six-month NDF rate was Rs 41.70/42.20.

Marketmen believe that the strength of the economic fundamentals of the country will absorb any fluctuations and at the same time maintain the confidence of foreign investors.

As one dealer put it, ''If the rupee falls, it will not not be due to any sanctions or political events, but because the government wants it to be at that level.''


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