Did the Rupee know that Lou Bega was in India? Well going by the kind of volatile Samba it did on the forex markets last week it must have definitely known. Between May 23rd and June 1st the rupee slid from Rs 44.04 per dollar to Rs 44.57 and that too after touching a low of Rs 44.74 in between. This fall, coupled with media reports that the FM had taken the value of the rupee at Rs 45 per dollar in his budget for the Oil repayment account, has further sent shivers down the forex market.

So where exactly is the rupee headed and why this sudden samba now? The reasons for the fall in the value of the rupee are fairly obvious. An increased demand for dollars from importers which is indicative of heightened core sector activity and overall economic growth. Till about two months ago the demand from importers was more or less being met through the Foreign Financial Institutional inflows into the capital markets. But a crash in the markets has not only dried up this source of dollars but the FII's themselves have turned into buyers of dollars.

The RBI too has deliberately let the rupee slide to what it feels is a more realistic levels as it feels that the demand is from genuine quarters. In the last one year the rupee has lost only 1 to 1.5% as compared to the other south east Asian currencies which have lost between 5-7% in the same period. Also in the last one month the rupee has actually strengthened by about 3.3% against the Euro and 5.2% against the pound sterling. It has also gained 3.4% against the Japanese yen over the last calendar year. An overvalued currency means that we lose our competitive price edge in the world markets. So a drop in the value of the rupee will not really be uncalled for. A more realistic value of the rupee will make us more competitive in the global arena.

Historically the rupee is expected depreciate by 4% p.a. This is a depreciation rate built into most economic calculations and forecasts by economists. So the Rs 45 per dollar rate taken by the FM in his budget calculations was a way of minimizing the downward risk in the budget calculations. "In the coming week we can expect less volatility and the rupee should be rangebound between 44.30 to 44.50 to a dollar" said Mr.K.N.Dey, Senior Vice president of eMecklai, a leading foreign exchange firm. Other experts also feel that the rupee will fluctuate between 44.30 to 44.70 per dollar and may end the year at the Rs 45 per dollar mark.

Other than a change in the value of the rupee, the FCNR(B) rates, or the foreign currency non resident dollar deposit which are fully repatriable, have also gone up. From a low of 5.5%, last year these rates have moved up to the range of 6.5% to 7.6%. FCNR rates are linked to the London Inter Bank Offer Rate(LIBOR) which is a global benchmark for debt issues. With LIBOR moving up and quoting between 7.5% for 1 year, due to increase economic activity and growth in the world economies, it is but natural that
the  FCNR rates will move up. The NRE (Non resident external) accounts, maintained in rupees where the principal and interest are
repatriable, and NRNR (Non Resident Non repatriable) accounts-kept in rupee denomination where only the interest is repatriable and not the principle rates have gone down by about half a percent and are now quoting at 9.75% p.a. for 6 months to one year and 10.75% for 18 months to 36 months. This has led to an increased liability on the FCNR account front.

With foreign exchange reserves of close to $37 billion and an economy growing at a rate of over 6% annually, a more realistic value of the rupee will only improve our competitiveness on the export front. No need to panic. The fall in the rupee is for the good of Indian business and consumers.

Aru Srivastava