Speculation is pushing the rupee into troubled waters. Operators and investors are holding on to their foreign currencies as they anticipate that the local money will fall further. This exacerbates the shortage of foreign monies on the forex market and puts additional strain on the exchange rate of the rupee. Unless holders of foreign currencies convert them into rupees, the liquidity gap in the market will persist even if the international reserves of the country are at comfortable levels.

A monthly survey by Pluriconseil (Baromètre) to be published in l?express tomorrow reveals that a majority of the analysts interviewed believe that, unless there is a major move by the Bank of Mauritius (BOM) to restore confidence in the currency, the latter will slip still further.

A new interest hike will add some strength to the money in the face of depreciating pressures. ?There is still a lot of speculation going on as there are a lot of factors acting against the rupee. The Central Bank should increase the Lombard rate by 200 basis points at a go and at the same time flush more liquidity into the market? says Swadicq Nuthay, a senior fund manager at ACMS Fund Management.

He told l?express that ?speculators? should be convinced that the monetary authorities are serious about supporting the rupee. A co-ordinated move on the interest front and on the direct intervention mechanism will create much impact in terms of confidence in the currency. This should help encourage people to swap their foreign monies for rupees.

Support to exports

As matters stand, investors and operators are of the opinion that the BOM and government are more likely to allow the local currency to depreciate in a bid to support the export industries.

But a falling currency also translates into higher prices for imported products. Numerous price hikes have hit consumers over the last months as a result of the depreciation factor.

The Central Bank is also very keen to put a hold on the depreciating trend of the rupee. The governor of the BOM, Ramesh Basant Roi, recently warned ?speculators? in a speech he delivered at a gathering of businessmen. He said that the BOM will resort to drastic measures if people continue to speculate against the local money. However, he stopped short of displaying his cards to the public.

Some observers have interpreted his comments as a return of exchange control. Others have pointed to some milder moves whereby holders of foreign currencies are required to remit part of their foreign holdings to the Central Bank.

The latter will thus be in a better position to supply the market with US dollars, euros or GBP as and when market conditions so warrant.

Need to restore confidence

A return of a full-fledged exchange control is seen as a bad signal to the policy of encouraging foreign investments in the country.

On the other hand, a depreciating currency can do as much harm to foreign investors. Their returns on investment may be eroded when converting from rupees to another currency.

The Central Bank has already raised the Lombard Rate (the rate that guides interest rates on the market) twice this year. The rate was increased in July from 11.5% to 12%. It was further raised to 13% in September.

Some observers are concerned that a new hike might hit investments and growth prospects of the economy, in particular of new industries. Monetary authorities will have to do some fine trade-offs to restore strength and confidence in the rupee whilst helping businesses to compete on world markets.

However analysts point to the structural weaknesses of the Mauritian economy as the key reasons for speculation against the local currency. The economy should develop new competitive strengths as our traditional trade preferences are disappearing.

Industries will have to move to a new productivity level and adopt better management practices and more performing technologies. Playing with interest rates is seen as a short-term measure that does not help the broad purpose of economic restructuring.