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V. Ravi Kumar

A ROBUST performance by the dollar against the rupee last week. In the anticipated quick move once the "old" 48.43 resistance broke, it rallied to 48.60 before profit taking ensued.

The 48.52 level is a good support for the dollar now and the next move higher will depend on when the 48.62 resistance is broken again. Much depends on the demand supply situation now.

As the fiscal year end approaches, demand for the dollar is likely to outstrip supply and a gradual move to above 49 levels is expected by the end of this fiscal year. Trade data released also support this view.

Though exports grew for the second straight month in December after showing a falling trend for the previous five months. Despite this, export targets are likely to be lower than the drastically reduced aim of a 3 per cent growth for the full year. This is largely due to a weak global economy.

Exports in December grew to $3.96 billion from $3.65 billion in the same month a year earlier. Imports in December grew by almost the same level as the rise in exports, presenting a balanced trade number, at least for one month.

However, non-oil imports grew $7.53 billion during April to December 2001 to $ 27.73 billion, suggesting renewed domestic demand. One of the factors contributing to a steady rupee has been the price of oil. India's oil imports were down 14.64 per cent in April-Dec 2001 to $10.62 billion from $12.44 billion from the same period last year.

In the overseas markets the dollar has had a very robust week, dipping marginally on profit taking. The trend is likely to continue in the near term. The dollar ended just above the 86-cent mark against the euro, having hit a 6 month high at 0.8564 just a few sessions earlier.

A strong dismissal of US manufacturer's strong dollar woes by the US Treasury Secretary Mr Paul O'Neill, pushed the dollar over the psychologically important level of 135 yen to the dollar. Thus the dollar hit a fresh 40-month high before the pre-weekend profit taking set in. Also some Japanese officials gave warning signals about the speed of the move.

Mr O'Neill has always been known for his forthright manner and this time he commented that that good companies do not live or die by exchange rates. His comments were taken as a bright green light by traders to push the US dollar higher against the Yen.

A closely watched US survey has hinted that the recession-hit manufacturing sector in the US may have passed the worst.

The Institute of Supply Management said its manufacturing activity index rose to 49.9 in January from 48.1 in December. Any number below 50 indicates contraction in the manufacturing sector.

Also jobs data showed an improving employment picture. Non-farm payrolls fell by 89,000 last month, slightly more than had been forecast by economists. But the drop was significantly smaller than the 130,000 jobs lost in December and the unemployment rate eased to 5.6 per cent from 5.8 per cent, compared to an expectations of a rise to 5.9 per cent.

Turning to the money markets in India, one can only say that is one is spell bound by the spectacular fall in yields of the Government securities. This rally has been fuelled by the excellent liquidity conditions in the monetary environment.

With 10 year G-sec yields at 7.65 per cent levels, the rally looks like continuing as long as the liquidity in the system continues to be buoyant. With the yield on 4-month T bills at 6.55 per cent, the spreads across the yield curve are already compressed.

What is keeping the short end up is the daily repo bid rate of the RBI at 6.5 per cent.

What will be of interest to the market is when and by how much this repo-rate drops.

The secondary market in Corporate bonds has also joined the bandwagon of falling yields and particularly this week, the sub AAA segment.

The lower rated papers are now seeing healthy bidding interest by players looking to cash in on spreads over the comparable government papers.

With most players focusing on the G-sec markets the Corporate bond market has been sluggish of late.

(The author is Head, Treasury, at Vysya Bank, Bangalore. The views expressed here are his own and not necessarily of his employer.)

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