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Economy

Dollar Rises and FIIs Sell

So the dollar has risen like crazy. From 39.9 a couple weeks back, to 42.5 today. And getting stronger. Is this FII profit booking?

Heavy dollar buying by foreign banks on behalf of their custodian clients in the non-deliverable forward market (NDF) along with continued dollar demand from oil companies led the spot rupee to breach 42 and reach a 13-month low of 42.2150 on Tuesday.

According to dealers, the spot rupee opened a tad stronger at 41.98 after closing on Monday at 42 to a dollar. Demand from foreign banks to buy one-month dollars in the NDF market triggered the fall, which was further enhanced by dollar buying by oil companies.

Dealers explained that most of the custodian clients (foreign institutional investors) were booking profits on their investments in India but phasing out the repatriation of funds through NDF dollar purchases in forward market.

FIIs definitely have been selling recently, according to SEBI stats. A theory is that this selling is due to lowered leverage offered to hedge funds after the credit crisis worldwide. Another is that this is simply profit-booking, to counter huge losses in the credit markets.

Either ways, this adds on to oil buying by the oil companies, which requires a lot of dollars, obviously.

A lousy rupee is bad for inflation because imports get costly, and international prices of commodities are high. Double whammy there.

And my new conspiracy theory is the dollar is propped up to keep the exporters really happy so that the Karnataka elections can be won.

So how bad can the dollar get? Technically speaking, the charts show no resistance till 44. But being purely technical in a market like this is stupid. SO obviously it will stump all the technicals and go topsy turvy and confuse the hell out of hedgers.

But there is hope, I think. This is likely to be part of a huge pullback rally on the dollar worldwide, and in the US markets. The credit crisis will soon slip into phase 2 – post July , I think – and the subsequent drop in all sorts of asset prices should push the dollar to much much lower levels. So this is a chance for those that didn’t get a chance to hedge – eventually they’ll remember these levels fondly.

But note carefully that I have been wrong so often it’s worth taking anything I write with a lot of salty. Salty advice. That’s what I should call this blog really.

  • Mumbai Journo says:

    >So you think one should sell metals, realty, etc in anticipation of a contraction sometime in July?

  • Deepak Shenoy says:

    >Metals and realty? By July? I think that’s reading way too much into what I’ve said 🙂

    There’s no connection with dollar and metals, and dollar and realty here (not as far as I’ve noticed anyhow)

    Metals are strong – why sell them? And realty is hosed anyhow, but there are promoter prop-ups coming around so be careful of any short.