Foreign portfolio investors should welcome their new freedom to book forward cover for their investments in debt instruments. The uncertainty attached to interest income (in foreign currency) from a possible (remote as of now) depreciation of the rupee has ended. Net of forward premium, the extent to which interest income in India is higher than abroad becomes transparent. The assumption is that to the extent foreign portfolio investors buy forward dollars, the Reserve Bank of India will have to intervene less to brake rupee appreciation. The decision to nudge the rupee towards full convertibility thus seems twice blessed. It will be a new ball game for the forex market from now. Hitherto, the exchange rate was decided by the interplay of imports and exports. The real economy apart, the forex market will now have to accommodate expectations (of foreign portfolio investors) of the future behaviour of the rupee.

So, will the rupee depreciate, however marginally? Foreign portfolio investment in debt instruments, both the government and private, should increase and with it the inflow of dollars (that is, of foreign currency) into the spot market. Since this will give a fillip to the rupee, the inflow of foreign funds is likely to exceed their outflow with a consequent decline in the forward premium. Assured rupee appreciation should boost foreign portfolio investment in Indian equity. Foreign currency reserves, already $26 billion, will burgeon. The strong rupee seems slated to get stronger in the foreseeable future.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.