Tuesday, September 25, 2007

Breaking the 40 line barrier

There are sensible speculations that rupee which has already appreciated to 39.60 per $ will appreciate further to the range of Rs. 33 - Rs. 34. Here are a couple of strong reasons :

1) RBI is looking to increase the CRR by another 50 basis points by this year end to wipe off some liquidity to contain inflation within 4 - 4.5 % range

2) The Federal reserve is looking at a 1 basis point cut from the current 4.75 % to 3.75 % by mid January to increase liquidity in U.S.

As we look at the 1st reason, an increase in CRR (cash reserve ratio : which is the sum that every bank has to park in RBI) will mean wiping out a certain amount of money close to a $ 3 bn out of the system ---- > this will increase the demand for money and as a result lead to rupee appreciation against dollar.

The second reason which primarily concerned with the economies of U.S will increase the liquidity in U.S and as a result FII money will flow into India. ----> This again will lead to demand for rupee which will result in rupee appreciation.

Added to this, a bit of recession in the economy of U.S and subprime crisis has led the dollar to weaken against all currencies world over,another reason that can lead to rupee appreciation.

Lets look at a few strong factors for dollar appreciation :

We can expect the RBI to interfere and artificially depreciate the rupee to help the IT , ITeS and export companies but the RBI is giving some strong signals to the export companies to evolve and cope up with the appreciating rupee ever since rupee had broken the 43 line barrier.

The other factor that can lead to dollar appreciation is when the Indo - U.S Nuke deal gets operationalized since then a lot of money will flow from India to U.S. But then again with the Indian politics playing so much against the Nuke deal, we can expect operationalising the deal to be put off for another year or so.

So as of now you can just sit back and look at dollar tumbling over.

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