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Saturday, July 21, 2007

Rupee-dollar equation


One more thing, I have a contrarian opinion on slide of Rupee. Everyone is now talking of the slide in rupee and they are predicting that it would take rupee to as low as 35. But I feel that rupee will not sustain any levels below 40, if it goes to that levels, then it will bounce back to 40+ or may be above very strongly. Why?

To answer why we will have to answer first thing that why rupee appreciated at all? It got appreciated because: we had more dollar flow compared to rupee. Which led to the pressure on dollar and it got depreciated. We earn dollar whenever we have made any export in dollars, investments by FIIs/FDIs and vice-a-versa incase import is made/an exit by FIIs. If economy is booming and we have had export surplus (more export compared to imports) then it puts pressure on dollar, because we get more dollars. We understand from the law of demand and supply that whatever is more in the market gets depreciated (reduced in value). That's what preciously happened with dollar.

Now what different has happened which has made me conclude that dollar will not depreciate (or rupee will not appreciate) any further? Something major has changed which will change the balance of payment towards dollar. This will raise our import bill by at least 35% compared to April'07 while the rupee has not depreciated that much. The major factor that constitute our import bill is crude oil which is now trading at $75.97 per bbl compared to $55 per bbl few months ago. This is a change of more than 35% and would seriously dent import bill (or exit of dollar). The impact will not be visible to us immediately, it will take a month or two to show some signs and that would be the time when rupee will be depreciated again.

These are my two-pence-worth and I tried to keep that as simple as I can. You may like to share your views.

Niteen S Dharmawat
Mobile: 9850571857

p.s.: Rise in crude price is not good for other industry and could further have impact on several things including inflation. But that's little complex to understand. Till that time we should not worry too much about the nothing and keep our investment in quality stocks. Also dollar is depreciated because of it's own good reasons in their home economy. While presenting the analogy, I have kept it to our shores and compared it with rupee only because that will make more sense to us.