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Forex Market Commentary

Indian Rupee will rise in 2007

Indian rupee will strengthen next year and will rise 3.8 percent to 43 per dollar by the end of 2007, according to UBS Investment Report.

The rupee was the second-best performer among the 15 Asia- Pacific currencies tracked by Bloomberg in the past three months with a 4.2 percent gain as global investors bought a net $5.94 billion of shares since July.

The economy grew 8.4 percent in the fiscal year ended March 31, compared with 7.5 percent the previous year, the second fastest behind China among the world's major economies.

India's currency may benefit as refiners will need less to pay for oil imports after crude fell more than a fifth from their peak. India gets three quarters of its energy needs abroad.

The rupee also may gain as overseas funds are once again buying shares at an average to $1 billion each month.

Overseas corporate borrowings have picked up in recent months and UBS predicts that this foreign currency borrowing could exceed $17.3 billion level in the current financial year.

The Reserve Bank of India has also eased norms for overseas borrowing in the October Monetary Policy Review. Now corporates can borrow $250 million (in a year) without prior approval, if the maturity of the loan is 10 years or more, which is over and above the previous annual limit of $500 million.

Thus combination of falling crude oil prices, investment in stocks by global funds and higher overseas borrowings by local companies will help in rise of Indian Rupee. However, biggest threat to UBS forecast of strengthening Indian Rupee is if the RBI decides to stem gains in the rupee and intervene in the market.

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