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Gold import news sends rupee up, but appreciation seen as temporary
March, 17th 2012

The doubling of customs duties on both gold and platinum, as also on imported jewellery and an expectation of a lower current account deficit helped prop up the rupee on Friday versus the dollar, though analysts said it was a temporary effect that would soon wear off. The rupee closed the day at 50.1

8 to a dollar, up 20 paise from Thursday's close.

Current account deficit occurs when imports are higher than exports, resulting in a net outflow of foreign exchange while doubling of customs duties helps in curtailing demand to a certain extent, also preventing an outflow of foreign exchange.

India's current account deficit for current financial year is expected to be 3.6% as a proportion of its GDP and is expected to decline in the next fiscal, 2012-13.

The finance minister also doubled the customs duty on gold bars, coins and platinum to 4% from 2% and on gold jewellery to 10% from 5%.

Excise duty on refined gold was also doubled to 3% from 1.5% earlier.

"I don't think you can ascribe any effect of the budget to the rupee's appreciation vis--vis the dollar on Friday because there was nothing really in the budget that would boost forex inflows," said Raghavendra Nath, managing director, Ladderup Wealth Management, a financial consultancy.

A report prepared by India Infoline said that rupee may again demonstrate weakness and depreciate further against the dollar, not withstanding Friday's appreciation, as demand by importers to meet their quarter and year-end liabilities will result in forex outflows.

"The budget itself had little impact on the rupee's appreciation it was more to do with the normal volatility in currency trading. While we expect that money will continue to flow in, the exchange rate is unlikely to deviate too much and will trade in a tight band," said Amar Ambani, head of research, India Infoline.

Ambani added that any further increase in global crude oil prices, currently around $120 per barrel, could put pressure on the rupee to sustain its recent appreciation versus the dollar.

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