GalaTime

Given the Indian rupee’s rapid rise versus the dollar since 2006, and the gobs of FII/FDI/NRI/… money expected to keep coming in, there is certainly a case to project this trend in the future: Indian rupee may rise to 33 per usd in five years - Lehman Bros

Lehman Brothers (NYSE:LEH) said the Indian rupee may appreciate to as high as 33 per usd in the next five years and expects the Indian central bank to follow a ‘middle-path’ in handling the currency appreciation.

Subbaraman added that he expects the Indian foreign exchange reserves to surge to about 900 bln usd by 2017 from the current 250 bln usd due to the central bank’s heavy buying of dollars to prevent excess appreciation in the Indian unit.

However, the big daddy of global markets - Goldman Sachs - disagrees (atleast in terms of valuation): Goldman Sachs reportedly cutting exposure to emerging markets

The U.S. investment bank said Brazil’s real is 28% overvalued against the U.S. dollar, as are the currencies of India, at 22%; South Korea, 32%; Hungary 42%; Poland, 60%; and Turkey, 74%, according to the report.

For a detailed look at India’s $250B forex reserves, and where the rupee might be headed, let’s turn to Morgan Stanley: The 250 Billion Dollar Question

. . . the trailing 12-month sum of FX reserves has increased to US$100 billion. This compares with the average annual increase of US$38 billion over three years prior to these seven weeks.

A higher cost of capital in the domestic market has enticed the corporate sector to increase reliance on external debt inflows. While a cut in policy rates can help to reduce these inflows, the RBI is choosing to defer this move . . . Indeed, food price pressure has kept the consumer price index (all three work groups) in the 5-8% range. The RBI has also highlighted its concerns on the potential risk of sharp inflation in China getting transmitted to its trading partners.

. . . the RBI could allow appreciation of the exchange rate to avoid injecting liquidity (by way of buying dollars and selling rupees). However, the exchange rate is already over-valued. The 36-country real effective exchange rate is about 8.6% higher than the ten-year mean as of July 2007.

. . . infrastructure investment is the best application for this liquidity arising from capital inflows, because we believe that one of key constraints to potential growth (i.e., effective aggregate capacity) is relatively low levels of infrastructure investments.

during the quarter ended June 2007 (the last official data available), total external loans had increased to an annualized rate of US$33.4 billion. We believe that policy makers may now focus on restricting external loans raised.

Bottom-line: Even if the rupee is overvalued by historical norms, the short-term trend is very bullish.