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| Strong IIP key to stable rupee | | Current surge due to liquidity inflow |
| Malini Bhupta / Mumbai Feb 03, 2012, 00:10 IST |
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 As far as the markets are concerned, 2011 will go down as a forgettable year. The rupee particularly saw intense volatility. It fell 18.7 per cent, especially as speculative activity intensified in the forex market after the Reserve Bank of India (RBI) became vocal about a non-interventionist stance. However, in the first few days of 2012, the currency has recovered 7.46 per cent.
Going by the January dollar inflow, optimists are betting on the rupee touching 42-44 by June. While a healthy PMI indicates industrial activity is picking up, strategists say all is not well. The surge is more because of liquidity inflow than a change in macroeconomic fundamentals. Standard Chartered forex strategist Priyanka Kishore sees the rally continuing for a week.
The IIP data, expected next week, will be crucial. Even as the December IIP print was better than expected and the PMI has positively surprised, the sustainability of this growth is being questioned, given the slowdown in investments. Emkay Global equity strategist Dhananjay Sinha believes the IIP print has to sustain at 6.5 per cent for the rupee to sustain at current levels.
Kishore says the country’s balance of payments is dominated by the capital account. Within that, portfolio flows and short-term debt are important constituents. The composition of flows determines how volatile the rupee would be. For this reason, it appreciated sharply in late 2007 and early 2008, as large amounts of money came into equity markets, and fell once the FIIs withdrew. However, the difference between 2008-09 and now is that India’s foreign assets as a percentage of GDP then were higher than at present, as was the import cover. The country has an import cover of 6-7 months, against 14 months in 2008.
According to Goldman Sachs, the rupee has performed well since the start of 2012 due to the risk-on sentiment and measures taken by RBI to support the currency. However, it expects near-term headwinds due to euro zone concerns and a rising current account deficit. Clearly, industrial output figures in the coming months will be key. Going by the recent uptick, Standard Chartered has revised its forecast for the dollar-rupee index to 51 from 53 at the end of Q1 of 2012.
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