HOW MUCH MORE WILL RUPEE 'APPRECIATE' MODI'S WIN?

By Ruma Dubey

All the attention, for now, has shifted from the stock market to the rupee. The stock markets have shown their meteoric rise and it now awaits more triggers – formation of new Govt, who holds what portfolio and then the ultimate aphrodisiac, the Union Budget. So for now, the market are like a crouching tiger, waiting in anticipation of a bigger rally.

And this sense of optimism has percolated down to the rupee, which has also appreciated against the US dollar, a phenomena which seemed impossible till a few months ago. From a scenario where one was talking of rupee sliding down to Rs.68 and Rs.70 levels and today, the rupee opened at a 11-month high of Rs.58.53 v/s US$. Little wonder then that today the bag of losers on the BSE is led by IT stocks, whose over 60% income comes via US dollars.

Rupee opened at a 11-month high of 58.53 against the dollar riding high on the Narendra Modi-led win by the NDA at the national elections and subsequent inflows in domestic equity markets. So within a week, the rupee has appreciated from Rs,60 levels to now Rs.58 levels. The news on the Mint Street is that RBI likely intervened and stepped in to buy dollars to stem the rupee appreciation. And word out is that every time, there is any sharp rise RBI will come to the rescue.

So what does this mean – when rupee falls, RBI steps in and even when rupee rises, RBI steps in? Well, a rupee fall is directly catastrophic as it increases costs all over, right from the petrol you fill up your tank with to the equipments and raw materials which companies buy. When rupee falls, importers cry while exporters make merry. The exact opposite happens when rupee rises – it bodes well for those having high forex loans as their MTM losses could narrow. When overseas debt has to be serviced with rupee earning in an appreciating rupee environment, the forex losses could be cirbed or there could be forex gains, depending on the hedging. Thus in this scenario, keep a watch on companies like Suzlon, Tata Power, PFC, JSW Steel, SAIL, Sesa Goa, Sterlite Inds, Essar Oil, Bharti Airtel, Arvind, Bhushan Steel, Lupin, Aban Offshore, IOC, Chambal, NTPC, Usha Martin, Shree Renuka.  But at the same time, export oriented companies earnings could get hit – IT, pharma, garments, electronics, engineering products, handicrafts, leather, marine products, carpets. The gems and jewellery exporters would have a mixed bag as the high import cost will surely come down due to rising rupee but if it rises too much, the net effect will turn negative. Thus like all things in life, too much of a rise or a fall is not good as sudden change hurts.

And that brings us to the most logical question on everyone’s mind – where is the rupee headed? This is as tricky as predicting the monsoon; we can only predict the trend based on the permutations and combinations available now. So as of now moods are optimistic and there is the promise of the economy finally moving out of the morass of policy paralysis. Thus this optimism means the rupee will remain around the same levels.

Most of the analysts concur that rupee sliding to Rs.55 levels seems unlikely in the immediate future. In fact RBI Governor was quoted saying that rupee at Rs.55 would be too strong just as rupee at Rs.70 would be too weak. Thus any major rise in rupee, RBI is sure to step in. The rupee is expected to stabilise around the current levels of Rs.58 supported by FII inflows and in current first half of FY15, rupee is estimated to trade around Rs.59-60. Also remember, it is imperative for the RBI to have rupee at Rs.60 levels in order to reduce Current Account Deficit. Thus at this juncture, a runaway rupee will cause more harm than good.

At the end of it all, it is not Modi but strong macroeconomic measures which will work; once the economy indeed takes off as promised by Modi, which is a 2-3 year process, in the long run, if same sentiments continue, we can see rupee at Rs.48-50 levels.