Indian Rupee getting hotter day by day

For the first time after nine years, the rupee breached the psychological mark of 40 to touch 39.85 against dollar on September 20, 2007. With US Federal Bank cutting the interest rate by 50 basis points, the rupee has breached the level of Rs. 40 much before than expected by the markets. The main reason being the sudden spurt in capital inflows. BNP Paribas' country treasurer Manoj rane said: "the rupee could touch 38.5 level against dollar by year-end. we can expect the rupee to rise further on the back of strong capital inflows".

Why the US FED rate cut influences our currency?

Typically, when US lowers interest rates, FIIs begin looking for greener pastures like India and China, where they can earn a higher return. When dollar inflows rise into these countries, local currencies in these markets begin to grow stronger. Hence, as a result of US FED rate cut by 50 basis points and also hardened interest rates in India combined with strong capital market, there will be a spurt in FII inflows in short term which will increase the demand for rupee and thereby, rupee will appreciate further. If the dollars coming into India are not compensated by the requirement of importers, the RBI has to intervene into the forex market by buying dollars so as to maintain the current level. But, it has side effect, the increase in money supply and thereby, inflation. Keeping in view the general elections in 2009, the Government cannot afford to neglect inflation management. As the role of RBI is limited in the present circumstances, the Rupee will appreciate further and I expect the rupee to appreciate to a level of Rs. 35 towards the end of current fiscal.

The appreciation of rupee during the current financial year already effected many sectors like IT, textiles, leather industry, pharmaceuticals. This new phenomenon has forced many mid sized software and other exporters to hedge against the foreign currency fluctuations.

With the appreciation of rupee and also acceptability of rupee increasing in the Gulf and South East Asian markets, trading in rupee futures is picking up. In Dubai exchange, rupee futures trading is already picking up.