Will Rupee Strengthen against Dollar

Although  the broader market index declined by 25 percent  in 2011,the performance was even worse in dollar terms ,because its declined by 36 percent .The reason for such a  dismal performance was sharp depreciation of the rupee  vis –a the us dollar in the second half of the year .Last year ,the rupee depreciated by 19.24 percent against the us dollar , with most of the depreciated –almost 18.66 percent taking place in the second half of the year alone .

For flls it was a double whammy, First the suffered the worth of a downfall in the equity market end the second was the concern of the depreciating rupee .The volatility in the rupee remained one of important reason why the flls shied away from the Indian equity market .However, with the down of this year .Thing are taking a turn for the better.

If we look at the rupee –dollar exchange rates, it primarily depends upon two factors –the balance of payment (BOP) and capital flows (both portfolio and direct investment).Last year the sudden and persistent rise in oil prices coupled with lower tax collection (owing to slowing economy) made the BOP situation worse. According to  Sengupta ,however ,BOP risk is overdone for India ,”He believes that the situation will improve here on ,”The reason is because the dollar itself   is strengthening .We think that the dollar will peak at around 1.25per Euro by March 2012,and will settle down at around 1.3by December 2012.Moreover ,we have a high current account deficit f there percent plus ,but that should be covered by capital inflows .We are  surprised by the upside  of inflows.ECB is USD 10 billion ,FDI is high ,NRI deposits have been high and the invisible number are high .If you see BOP , It is the same  at that in September last year. So it means that   it is low as a percentages of the GDP, he adds.

Therefore we believe that the risk to the rupee is less then what has been priced in. Also, out of the total external debt, almost 17 percent companies NRI deposits and a lot has been in trade credits to oil companies that will we rolled over .Even if we look at the de-leveraging of the European banks in India have around USD 6 billion borrowing, which is not that big, Sengupta explains .The market also seems to understand this and ,its reflected  in the current strengthening of the rupee against the US dollar. Year till-date (January 20, 2012), the rupee has already strengthened by 5.6 percent and in Sengupta’s opinion; it will be around 49 per US dollar by the end of year.