In the long run, the direction of the Rupee is determined by the tug - o' - war between India's trade deficit on the one hand and foreign capital inflows on the other.
So far, the trade deficit has managed to drag the Rupee down. This is so because the country's need for oil and capital goods imports - the largest components of India's import bill - is very large and far outweighs exports. The trade deficit clocked $ 4.5 billion in fiscal 1995 (April 1995 to March 1996) but is expected to improve to $ 3.5-4.0 billion by March 1997. In the post liberalisation era, the largest components of capital inflows have been portfolio investments by FIIs in the equity markets. This is a fickle source of capital and India has been unable so far to attract the far more stable and desirable FDI in the scale required to offset the growing trade deficit.
1997 could well be a watershed for the India debt market, which has now
been largely thrown open to foreign investment. As such, large inflows
are expected on this front over the next few years. Reliance Industies
Ltd, India's largest private sector company, has borrowed in excess of $
900 million in international markets since late 1995, with tenors
ranging from 30 years to 100 years. The Government of India (GOI) is
expected to announce India's maiden sovereign debt issue in The Budget
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In the short run, movement in the Rupee is subject to herd mentality. This was amply demonstrated in the period October 1995 to February 1996, when the corporate sector, lulled by a Rupee which stayed rock steady at 31.37 over 1993 and 1994, scrambled to cover their long term liabilities, fearing that the Rupee might fall all the way to 40.00 on the Dollar.
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