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ASSOCHAM Forecasts a Stronger Rupee Ahead

Sep 28, 2012 6:57 AM   By Dilipp S Nag
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RAPAPORT... The U.S. dollar is likely to drop below INR 50 in less than three months and then stabilize due to a host of policy reforms in India, the return of foreign institutional investors (FIIs) to the Indian stock market and the weakening of the dollar against major currencies, according to an ASSOCHAM forecast.

After rising 25 percent in the past one year against the rupee, the dollar has already experienced a sharp correction in the past two weeks after global investors turned back to India following the government’s determination to push ahead with the reforms, ASSOCHAM noted. At present, the rupee is trading at around INR 53 to $1.

“The courageous decisions on foreign direct investment (FDI) in multi-brand retail and hiking diesel prices in the face of widespread political opposition were the turning point,” said Rajkumar Dhoot, ASSOCHAM’s president. “It so happened that these decisions coincided with the quantitative easing in the U.S. and Europe resulting in rush of liquidity in the global markets.”

The study noted that the most immediate gain  would be a sharp reduction in the  price of crude oil and  raw gold. India meets about 80 percent of its crude oil requirements from imports and its gold imports last year were $60 billion. “To the extent, rupee gains, our infamous imported inflation would also come down,” Dhoot said.

The projection of a stronger rupee is based on factors such as a reduction in merchandise imports, an upbeat mood among those who want to bring in FDI, the release of funds from dollar assets into the global markets and the FIIs betting again on the Indian equity, ASSOCHAM stated.

After a lull, activity for FIIs increased in September, pushing the Sensex higher. While exports have fallen due to an economic slowdown in western economies, imports have dropped due to the slowdown in the domestic demand and gold imports, too, have been weak, the study reported. After a record import of $60 billion, gold imports are expected to show a considerable decline. “This will also result in less demand for the hard currency required for the imports,” the ASSOCHAM study said.

The study noted that while depreciation of the greenback may not appear to be  good news for exporters, the counter point is that a stronger rupee would also mean reduction in the costs of raw material and manpower.

“To that extent, our exports would become competitive. Reduction in raw material cost has a huge bearing on the final cost of the shipments, especially in the case of manufactured exports,” the study concluded. The bulk of India’s merchandise exports are manufactured goods such as engineering products, gems and jewelry, petroleum products and textiles.
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Tags: ASSOCHAM, Dilipp S Nag, Dollar, export, FDI, FIIs, gems, Import, India, Jewelry, Rapaport, Rupee
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