India: Rupee Continues to Strengthen

February 2nd, 2012
in econ_news

Econintersect:  The rupee was crushed vs. the U.S. dollar in the second half of 2011, rupeeSMALLlosing 22% from an exchange rate of 44 to the dollar in August to more than 53 to the dollar in December.  See GEI News (link in Sources references below).  In early trading Wednesday the rupee had pulled back to 49.64 to the dollar after closing at 49.46 on Tuesday (January 31).  However, final values for the day found the rupee much stronger at 49.17 according to x-rates.com.  That is a gain of nearly 8% in less than two months.

Follow up:

Shankar Sharma, Global Trading Strategist with First Global, expects the rupee to continue strengthening.  His thinking was given in an interview with The Economic Times last month:

We are very comfortable on the current account. We are only half percent of GDP as a deficit if we exclude gold. I exclude gold in current account because that is a misclassification. Gold is a capital account transaction. It is not the same as oil which is consumed. An investment account transaction has to be a balance sheet transaction and balance sheet transaction is a capital account transaction. So, if you take gold out of the current account, the current deficit is hardly between $8-$10 billion which in a $1.5 to $2 trillion economy works out to 0.6% at the maximum. This is extremely comfortable.

I anticipate a correction of 20% in oil. The $130 billion oil bill will fall by $20-$25 billion or thereabouts. So, you are virtually looking at a current account surplus excluding gold.

On the capital side, things are looking very good. We had the best year of all time in FDI. We will end the year with anything between $25 to $35 billion in FDI. That is cumulatively probably 2.5 times of the last three years total.

Sharma suggests that the rupee could recover much of the way back to the August 2011 value of 44.  He expects the exchange rate to get as strong as 45 rupee to the dollar in 2012.

Sources:

  • x-rates.com (using values from Wednesday February 1, 2012 as listed at 10:00pm New York time)

Hat tip to Sanjeev Kulkarni.









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