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The poll, which had 100 respondents, was taken over a period of 2 weeks (Sep 23 to Oct 5).

Clearly, the market was more or less evenly divided about the 44.00 level for the end of the calendar year. About 55% of the respondents expected the rupee to end the year between 43.00 and 44.00; the largest number (31%) expected the rupee to be between 43.75 and 44.00. While the sharp fall over the past week does seem to suggest that the rupee will be weaker than 44, it remains to be seen whether exporters accelerate selling at higher levels, which could bring the rupee back to that level.

where will the rupee be on mar 31, 2006?

Interestingly, the median of the forecasts for Mar 2006 suggested a stronger rupee (relative to the forecasts for Dec 2005) by nearly 20 paise. The range was, of course, wider, with most of the extreme numbers on the strong rupee side. Again, about 60% of the respondents expected the rupee to end between 43.00 and 44.00, while the largest number (only 20% in this case) looked for the rupee to close in the range of 44.00 to 44.25.

currency markets view: rupee and majors

USD/INR
Fortnightly movement: O- 43.97 H- 44.43 L-43.9350 C-44.39
Sentiment - rupee weak; likely to remain weak
Expected range for 1 Month: 44.00-45.00
Expected range for 3 Months: 44.00-45.50

The rupee finally fell below 44 this past fortnight, as the rising current account deficit took its toll. Over the past month or two, bullish sentiment for the rupee has been rapidly evaporating, although many companies still appear to be in a "rabbit frozen in the headlights" mode to judge from the poll we ran recently. In any market, it is critical to keep questioning what can prove your view wrong - this is true when the market is moving in your favor, and all the more so, when it is moving against you.

With the market still skewed to the short side - i.e., a higher proportion of exports is hedged as compared to imports - we could well see continued, and sharper, losses for the rupee in the weeks ahead - 45 looks like a ready target. Dollar's overseas weakness and, of course, possible RBI activity could make it a rocky ride, but it does look like that market will have its way.

A key point to note is that RBI has been loudly absent despite the sharply higher volatility in the rupee - as reported last week, it is clear that RBI's tolerance for volatility has risen perceptibly. This is all the more noteworthy, given the increasing evidence that the NDF arbitrage is driving some of the domestic market action and, perhaps more importantly, the steady tick-tick-tick rise in inflation, as the base effect disappears.

One containing factor could be the broad expectation of a hike in interest rates in the next credit policy (Oct 25), the probability of which seems quite high given that RBI rejected all bids at the last GOI auction; the last time an auction devolved (RBI effectively did not accept the offers from investors) was in September 2004, more than a year ago. Conceivably, RBI may manage the rupee below 45 till the credit policy, and then depend on the rate hike to bring the rupee back a bit.

Over the medium term, however, it is hard to see any factors that could regenerate rupee bullishness. FII inflows will doubtless remain strong, as they have over the past couple of years. However, net FDI may not rise any more as it is likely that Indian investments overseas will rise faster than global investment in India (given process constraints). Of course, invisibles will continue strong courtesy the IT sector, but it is clear that the trade deficit will continue to rise as the domestic economy keeps up its 8% growth rate. Thus, the balance is likely to remain slightly against the rupee and we would look for a steadily weaker rupee over the next few months.

Further out, of course, we expect rupee bullishness to reassert itself. It seems clear that the 43.25 level that was hit in March 2004, when all stops were removed, represents market's perception of a "fair" price for the rupee. It tried to break above that level several times, but RBI was quite handily able to turn it back. Since that door is closed for now, it makes sense for the market to explore the other side. However, at some time in the quite near future, I expect that the market will recognize that Indian manufacturing has come of age, just as, in 2002, it suddently recognized that Indian IT had come of age. This will probably create the trigger for the next wave of rupee bullishness that will take the 43.25 stop out. The big question, of course, is whether this will happen in 12 months, 24 months or longer.

EUR
Fortnightly movement: O-1.2028 H- 1.2204 L-1.1899 C-1.2123
Sentiment - positive, likely to improve further
Expected range for 1 Month: 1.1875-1.2350
Expected range for 3 Months: 1.1650-1.2650

Hawkish comments from Fed officials and an unexpectedly strong US manufacturing ISM index pushed the euro just below 1.19 before a plunge in the US service sector ISM index and a perceived shift in the ECB's stance propelled the euro as high as 1.22. However, the euro lost some ground following a not as bad as expected US employment report last Friday and closed around 1.2125. The euro's strong recovery also appears to be related to a growing shift in market perception that the Fed is not merely normalizing interest rates but is chasing inflation at the expense of growth.

In fact, the surprisingly loud "fears of inflation" comments from more than one Fed governor (and, in one case, more than once) over the past few weeks suggests that the new Fed - post-Greenspan - may well be strikingly more conservative - i.e., more tilted to fighting inflation than promoting growth. This could spell an end to the virtually free money policy that Greenspan had released across the globe, which could have medium-term implications for global growth and, importantly, commodity prices.

From the point of view of the dollar, the potentially higher interest rates could prove supportive in the near term, once the current corrective rally runs its course - however, the medium term depends on how the U.S. housing market reacts domestically and how China (and its Asian relatives) reacts internationally.

From a short-term technical perspective, the euro is likely to find strong support in the 1.2000-1.2050 area before another rally to the 1.2300-1.2350 area and finding itself at the crossroads. Irrespective of what happens then, a rally to 1.26 plus seems increasingly likely before any sustained decline below 1.1650.

GBP
Fortnightly movement: O-1.7728 H- 1.7811 L-1.7514 C-1.7608
Sentiment: negative but likely to improve
Expected range for 1 Month: 1.7500-1.8100
Expected range for 3 Months: 1.7300-1.8300

Sterling underperformed the euro and fell below the 1.76 support to reach 1.7514 after UK Q2 GDP growth was revised down to an annual rate of 1.5% against the estimate of 1.8%. As the euro rallied from 1.19 to 1.22, sterling also rallied from 1.75 to 1.78 but then slumped again to about 1.76 after disappointing UK industrial production data and a growing possibility of another BOE rate cut.
From a technical perspective, sterling is likely to find support around 1.75 before another rally to 1.78 plus. Whatever happens therafter, a rally to 1.83 plus seems more likely before any sustained decline below 1.73.

JPY
Fortnightly movement: O-112.29 H- 114.40 L-112.06 C-113.75
Sentiment: negative (for yen) but likely to improve
Expected range for 1 Month: 110.00-115.00
Expected range for 3 Months: 106.50-115.00

Despite Bank of Japan's continuing rhetoric of an impending end to its 4-1/2 year old policy of quantitative easing, the yen also ended weaker around 113.75 after slipping as low as 114.40 against the dollar, on evidence of persistent deflation and a weaker than expected Tankan business sentiment survey. While a dollar rally to 115 can't be ruled out, a sustained rise above 115 yen seems unlikely before a correction towards 106.50.