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How Essar verdict can move rupee

Currency traders are turning bullish on the rupee, as they are going long (buying) on the local currency against the dollar.

, ET Bureau|
Nov 18, 2019, 10.11 PM IST
A suspected central bank intervention too weighted on the rupee.
The impact of the Essar judgement isn’t exclusive to distressed assets.

Currency traders are turning bullish on the rupee, as they are going long (buying) on the local currency against the dollar.

An estimated inflow of $7 billion into India from ArcelorMittal to pay off Essar Steel’s debt and recapitalise the local steelmaker should help strengthen the rupee by as much as 1-2%, or at least check any sharp drop in its value if the global trends turn adverse, said market players.

“There are flows lined up due to culmination of the settlement processes (of Essar Steel bankruptcy),” said Ashhish Vaidya, the head of markets at DBS Bank India. “It will certainly have a positive impact on the rupee in the shorter term,” he said, adding: “Subject to stable global macros, the rupee may rise beyond the 71 level in the short term.”

The rupee rose about 0.30% in early morning trade Monday with speculators betting on it. It later erased gains mirroring weakness in other Asian currencies, including in the yuan amid worries over the global trade war, and closed at 71.84 to a dollar compared with 71.79 on Friday.

A suspected central bank intervention too weighted on the rupee. The Reserve Bank of India is said to have shored up dollars using the initial rupee appreciation, said a dealer.

Out of a dozen Asian currencies, nine lost value to the dollar on Monday. The rupee remains one of the two worst performing Asian currencies this calendar year.

“Speculators are again taking a short position on the dollar, reversing their earlier stance,” said Anindya Banerjee, a currency analyst at Kotak Securities. “The Essar judgement brought in certainty about the fund inflows, which was not there before the verdict,” he said. “The rupee has suddenly found a reason to rise.”

While speculators were seen short-selling the dollar, importers found it an opportunity to buy the US currency citing the rupee’s long-term outlook.

"The rupee's trade (Monday) was in line with global trends and central bank intervention,” said KN Dey, the founder of Mumbai-based forex advisory firm United Financial. "Select importers intensified their dollar buying ahead of month-end demand. But, it (rupee) is going to rise once overseas funds start flowing in," he said.

The funds, to be paid to Essar’s lenders, will start flowing in within a week or so, as the lingering court case since the steelmaker went bankrupt has finally ended.

“ArcelorMittal has not opted for any loan from banks in India, but they are in talks with overseas banks,” said an executive with direct knowledge of the matter. It is expected to fund the outgo with a combination of internal accruals and bank credit.

ArcelorMittal is expected to pump in $6 billion to pay off lenders. Later, it would bring in another $1 billion to revive the company. Speculations are rife that it has already paid a part of the debt to Indian lenders.

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