Strong economy to drive rupee up.

The Indian economy continues to show strong indications of healthy growth, which should attract inflows and support the rupee.

As we get closer to the Union Budget, the rupee-dollar trade is getting choppy. The Indian currency has appreciated about 0.40 per cent to the dollar since the beginning of 2010. Analysts expect that in the long term, a stronger rupee is de rigueur.

The wax and wane in the short term is more closely related to global risk appetite, according to a Citibank report, with sentiment regarding the Euro region and the ripple effect of a potential Greek default being the chief determinants of risk appetite.

In the month so far, the US dollar has firmed up 3.14 per cent to 0.7404 against the euro on February 23, 2010 (the Dollar Index, representing the value of dollar against six major world currencies, is up 1.75 per cent), while the rupee has managed to hold its own, down just 0.13 per cent against the dollar and up 2.95 per cent against the Euro, settling at Rs 46.24 to the dollar and Rs 62.5 to the euro.

Analysts expect that Fed Chairman Ben Bernanke’s speech in Congress on February 24 will determine how long this trend of dollar strengthening will last, as it is positioned against a ballooning US fiscal deficit and no clear signs of a revival in the US economy. The euro looks like it will struggle for some time, given the stagnant economic environment and possible shocks from potential sovereign defaults from the PIIGS countries – Portugal, Italy Ireland, Greece and Spain.

However, strong growth in India’s economy is expected to boost the rupee in the medium to long term. The market is waiting for the Budget to get indications on how the fiscal deficit will be handled to get short-term cues to currency movements.

Nevertheless, economists point out that the Indian economy continues to show strong indications of healthy growth, which should attract inflows and support the rupee.

As a key pointer to the economic recovery, industrial output grew at its fastest at 16.8 per cent year-on-year in December 2009. The manufacturing sector, which constitutes around 80 per cent of industrial output, grew 18.5 per cent to set the pace of growth.

Citibank forecasts that the Indian rupee will appreciate to 43.9 against the dollar in the next three months and touch 41.50 over the next year, with a longer-term outlook of 40 to a dollar.

Source : Business Standard