Search the Internet          Tips  Sites: Finance, Investment

Low imports, inflows seen underpinning rupee

The rupee, helped by lower imports and steady capital inflows, is expected to remain relatively stable through to the end of the year despite slow economic growth and falls in regional currencies, economists say.

The currency has depreciated less than one per cent so far in 2001, to stand at around 47 to the dollar, and economists say it's unlikely to slip more than another two per cent by year-end.

GDP is expected to grow less than six per cent in the 2001-02 (April-March) fiscal year, after growing at an estimated six percent last year and 6.4 and 6.6 per cent the previous two years.

"Imports have been sluggish partly due to the slowdown," said Ajit Ranade, chief economist, India at ABN AMRO Bank NV.

"This, along with a growth in software exports, has kept the trade deficit in check."

Imports fell almost 10 per cent in April from a year earlier to $3.97 billion, with non-oil imports down almost 11 per cent to $2.77 billion. Exports rose 5.5 per cent to $34.9 billion, making for a trade deficit of $473.63 million, down 56.88 per cent.

Capital inflows, along with a lower trade deficit, are expected to push the balance of payments into a surplus for the sixth year running, boosting foreign exchange reserves to a record $42.91 billion on June 1.

Despite the slowdown, portfolio investments are expected to be much higher in 2001 than last year, although the Indian stock market has been among the worst performing in Asia this year.

So far this year, foreign funds have pumped a net $2.35 billion into Indian stocks against $1.56 billion for all of 2000.

"Valuations are attractive even though the earnings outlook is not very rosy," said ABN AMRO's Ranade.

"Research reports talk about how this is a great time to buy for investors willing to take a longer-term view. The inflows are probably a manifestation of that."

OVERVALUED?

Economists estimate that the rupee is overvalued in real terms by 3.5-4.0 per cent on a trade-weighted basis, raising concerns about a correction.

"But the dollar is at highs against other currencies and could correct," said Aashish Pitale, vice president research at JP Morgan Securities. "So that (overvaluation of the rupee) is not too much of a concern."

One the one hand, if the rupee does depreciate, it would help exports. "Several competing currencies depreciating more than the rupee could hit our exports," said Rahul Nayar, economist at brokerage firm Batlivala and Karani.

On the flipside, if the rupee depreciates too much, oil imports would become more expensive, and many economists believe this would hurt India's economy more.

While a weaker rupee may cheer the export lobby, a higher import bill could have inflationary effects across the economy, said an economist. Moreover, exports account for just about a tenth of GDP, and many segments, such as software, remain unaffected by small changes in the rupee's value, he said.

EYES ON OIL PRICES, RATINGS

Either way, if global oil prices spiral higher or if the country's sovereign rating changes for the worse, all projections about the rupee could be overturned.

Oil is India's largest import, and if prices rise as they did in 2000 the rupee would come under pressure.

An adverse rating change could also discourage investors.

Global ratings agency Fitch has already changed India's outlook to negative from stable, citing concerns about the budget deficit, the slow pace of privatisation, and a decline in the investment climate. But Moody's Investors Service and Standard and Poor's have not revised their ratings or outlook.

Tell us what you think of this report