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DSP Merrill Lynch forex report is bullish on the rupeenews
Our Corporate Bureau
12 January 2005
The latest DSP Merrill Lynch forex report (Cause & FX - INR: Stronger into 2005, January 2005) predicts that the rupee would strengthen against the US dollar in 2005.

While recent events have brought forward FX strength, says the report, the expectation of a revaluation of China's currency, the reminbi, is expected to fuel the rupee's medium-term performance. Market participants will continue to strengthen the rupee, and any weakness in it will remain shallow and short-lived.

The report notes that 2004 started with the rupee at Rs45.6 to the dollar, it weakened to Rs46.5 in July and then rose to Rs43.5 at year end. Its strong finish made it the best performing Asian currency against the dollar in December (2004), breaching a five-year high both as a result of a weakening dollar and substantial inflows into India.

Though dollar weakness played a part, the December move was reinforced by inflows on the back of a strengthening macroeconomic environment. Visible flows were mostly from foreign institutional investors, who bought $2.2bn worth of equities and debt in December, taking the full year total to $9.2bn in 2004. In hindsight, the forward premium had been slow to react and did not reflect actual strengthening that took place in December.

Highlights: The prognosis for the rupee in 2005 remains positive. First, we expect foreign investors to become increasingly comfortable with the policy environment as confidence surrounding the new government's ability to attract FDI improves.

Second, we expect the current account balance to remain in positive territory. Higher oil prices might be a drag but are not expected to pull the current account into deficit.

Third, dollar weakness and more specifically regional currency strength, which is reflected in our top themes for 2005, should provide support for a stronger INR. At the same time, Reserve Bank of India's (RBI) inflation concerns coupled with liquidity management challenges should allow the burden of adjustment of inflows to fall increasingly on the exchange rate.

We believe that the first half of 2005 will see INR strength. The risks to our view come from sustained high oil prices, China taking time to revalue, and unexpected US economic strength that could elicit an unwinding of short USD positions. Persistently high oil prices will also moderate flows and trigger the RBI to tighten monetary policy on inflation worries.

also see : Click here to view the complete report
RBI will be focused on inflation in 2005: DSP Merril Lynch report
Other reports by DSP Merrill Lynch

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DSP Merrill Lynch forex report is bullish on the rupee