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Will history repeat itself?

C Girish

Summer follows winter and winter follows summer. The laws of nature. And literally everything (well almost everything) in life follows a pattern. The rise and fall of empires - nations in the current context, trade cycles - with their booms & busts, fashions in dressing and tastes in music.

All seem to run a full circle. The old adage, "those who forget history are condemned to repeat it'" seems all so apt. Then why should the financial markets be any different? It makes me wonder whether the Indian currency - the rupee - should be any exception.

After all, the inexplicable laws of demand and supply (now more and more international in nature) should apply here too. How often have we witnessed a period of prolonged calm after which all hell breaks loose?

Listen to the footsteps

We have superimposed the trends of the last calendar year 1999, on top of the current years' and have tried to decipher the hidden meanings (if any) - like the Red Indians, who used to keep their ears to the ground to listen to the hoof beats of distant horses. The chart below, shows a distinct trend. The rupee, if it follows last year's trend, will depreciate. Though the spike to an all time low to 44.74 does seem quirky.

The dollar-rupee is headed north

After the Kargil adventure during the summer of 1999, the Indian rupee had settled nicely and was trading in a broad range between 43.30-43.65 till the end of April 2000. During this time when the capital inflows by way of foreign portfolio and direct investment exceeded almost $ 2.7 billion, the Reserve Bank of India has managed to check the rupee's appreciation by absorbing the excess dollar supplies.

The importers have become too complacent over the past many months due to the rupee's stability and were reluctant to hedge long-term liabilities even at an annualised premium below 4 per cent. They were hopeful of the situation to continue as the government announced the extension of RBI Governor, Bimal Jalan's tenure.

Is there a case for a weaker rupee?

During this passive period for the dollar-rupee, the US dollar continued with its pervasive strengthening over almost all the international currencies. This has caused the rupee to become overvalued against major currencies, curtailing India's export competitiveness and even threatening the domestic Industry with cheaper import prices. To give us an idea of how far the rupee has appreciated against many majors let us look at the following:

On September 29, 1999, the Indian rupee ruled at 43.58 per US Dollar, at 45.95 per Euro, at 71.79 per British Pound, at 23.49 per Deutsche Mark and at 28.69 per Swiss Franc. But on May 24, 2000, the Indian currency was ruling at 44.14 per dollar, at 39.91 per Euro, at 64.96 per British Pound, at 20.40 per Deutsche Mark, and at 25.55 per Swiss Franc.

In these circumstances it was feared that the authorities might maneuver depreciation in the external value of rupee and the first rumblings were heard during the initial days of May 2000, when the dollar rose and traded consistently above 43.65 and threatened to move past the historical high of 43.70. Today, the rupee was truly shaken as the dollar decisively broke through a host of psychological levels to touch a new peak at 44.74. The rupee however recovered quickly enough towards the end of the trading day as the RBI came out with a statement of measures aimed at controlling the market.

But fears and concerns are in one's mind: The reason which most financial media claims for the fall of the rupee, is 'negative sentiment'. To my mind this is sheer nonsense. I concede that night follows day in quick succession, but for summer to turn into gloomy winter, it will take, beg your pardon, a reasonable time. All the silver clouds cannot suddenly have developed dark linings. I personally think that the rupee fall is short lived and the sharpness (spike) is an aberration. But, the fall of the rupee has given rise to many a theory - from the obvious to the ridiculous. I will deal with some of them - either because they are relevant or because they are a good laugh.

1. Oil prices and the trade deficit: True, the rise in the import bill because of the crude oil prices will put pressure on the exchange rate, but it has been played up beyond its due weightage. The oil prices have since come down and exports have shown a smart growth rate. The trade deficit has shown a marginal rise during 1999-00 to $ 8.60 bio. from $ 8.20 bio. during the same period last year. So nothing alarming.
2. Inflation is rearing its head: The inflation rate now stands at 6.10 per cent, the highest in the past 70 weeks. This would have been a concern but for the fact that the rise in the rate is more due to the shifting of the base year from 1981-82 to 1993-94. There has been some impact because of the rise in oil prices but not all the price rise has been passed on to the end consumer. A non-issue as of now. No impact on the rupee.
3. Government's deficit: This has indeed been alarming and clearly the single largest cause for concern. But it is not showing up on the economy - either in the form of increased interest rates because of increased government borrowing (the 364-day treasury still yields 9.10 per cent) or an increase in the overall money supply (M3 is at 16 per cent) - not very alarming numbers. I would probably watch this as a crisis indicator. No concern here for the Rupee. As yet.
4. NASDAQ - an end of a dream?: Surely all irrational exuberance comes to an end. Or more correctly, aligns itself to more realistic expectations of the future. Now why is the BSE/NSE following the NASDAQ? Maybe because with FII flows and technology becoming ubiquitous across the world the same malaise afflicts both. But what has that got to do with the rupee? Surely FIIs are not pulling out their money out of the stock markets. In fact, the FII flows have been positive from October '99 onwards. So nothing for the Rupee in this. (And the compositions of the humble BSE/NSE do not have the remotest resemblance to that of the Internet-stock heavy NASDAQ)

So why are people panicking over the rupee? Overall, I feel the rupee will depreciate in a pattern similar to that of the past year - gentle and controlled. The positives in the Indian economy still outweigh the negatives - healthy reserves ($38 bio. at the last count), a pick up in the industrial growth and an encouraging climate for investments.

So, hold on! Calm your nerves and keep your assets in rupees!

(The author is the assistant vice-president, eMecklai.com)

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