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The Reserve Bank of India follows a policy of managed float vis-à-vis the external value of the rupee. Till recently, it was mostly buying dollars from the market, adding to its foreign exchange reserves which have now crossed the $200-billion mark.

If the RBI did not buy dollars, the additional inflows — primarily from remittances, export of services and capital flows — would have sent the rupee spiralling in terms of dollars thanks to the forces of demand and supply. This would have made Indian goods and services more expensive relative to foreign goods and services and affected India's balance of trade.

CHANGED APPROACH

But in the last few weeks, the RBI policy seems to have changed. The rupee has been allowed to rise and is currently at a nine-year high against the dollar. One important trigger for the reversal of policy has been the concern about the rising inflation rate. An appreciation of the rupee would make imported foreign goods (such as crude oil and petroleum products) cheaper (in rupees) in India. But, conversely, the rise in the rupee would make Indian goods costlier abroad and cut into exports.

Alternatively, if the dollar price of exports is kept fixed, the corresponding rupee realisation would be less. Either way, exports would become less profitable, relative to home sales. This, it was hoped, would divert some export products to the domestic market. Consequently, the availability of goods would increase at home, pushing down prices, helping the Government tame inflation.

There is yet another way by which the recent reversal of the policy on supporting the rupee is expected to bring down inflation. Under the earlier policy of buying dollars with rupees, an equivalent amount of rupees was being put into circulation. Other things remaining the same, this would push up the inflation rate. Of course, the RBI did not let other things remain the same. Quite often, it carried out "sterilisation" operations — that is, it sold government bonds to mop up the extra money going into the hands of the public as a result of the RBI buying up dollars from the market.

But there are some problems with this policy. Borrowing more from the market with government bonds would push up the interest rate. This, in turn, would attract more funds from abroad and the RBI would have to do more sterilisation. A point may come when the public — financial institutions, in particular — may not be willing to buy more government paper.

Indications are that such a point may have been reached in India where many banks are more willing to lend to private investors and consumers in a booming economy, rather than to the government at lower rates of return. In addition, the RBI has been running out of the stock of government bonds as it has for long been a net seller of bonds to the market. Together, all these factors (perhaps) forced the RBI to change its policy of artificially keeping the value of rupee low.

THE IMPACT

What are the likely consequences of this policy change? As already explained, the rupee appreciation should exert a downward pressure on the inflation rate. The profitability of exports is going to be affected. Up to a point, exporters can absorb the loss, if the profit margin is high enough to start with. But if the appreciation in the rupee continues unabated, they will feel the pinch and exports will suffer.

Another important consideration is the exchange rate policy of competing countries. Since, at this time, the currencies of China and other East Asian countries are still virtually pegged to the dollar, suppliers from those nations will enjoy a competitive advantage over Indian exporters. For example, the dollar price of Chinese textiles in the US market will remain the same when that of competing Indian products is tending to rise. If the growth rate of our exports slows down (the average growth rate of exports was an exceptionally high 25 per cent per cent over the last 5 years), GDP growth rate would also suffer to some extent.

All Indian companies are not going to be affected the same way. If a company is both an importer and an exporter and its foreign exchange inflows and outflows largely cancel out, the rupee appreciation would affect it much less than firms that are either large net exporters or importers. Thus, the impact for the gems and jewellery sector, which imports most of the raw materials and then exports the finished product, should be much less. But many Indian software and pharmaceutical companies ( lion's share of whose revenues is fixed in dollar terms) will find their rupee revenue and profit margins under strain. Indian exporters of textiles and commodities (such as steel), who have to compete with Chinese products could find their competitive position undermined.

Indian tourists will find their foreign trips a little less expensive while the opposite would be the case for foreign travellers in India. As a result, the Indian tourism industry — especially its high-end segment — would have a negative impact.

Because of higher interest rates at home, many Indian companies have been borrowing heavily from the international markets at lower rates, especially for financing their recent acquisition drives. The resulting foreign exchange inflows are an additional factor pushing up the value of the rupee.

ECBs ATTRACTIVE

If the Indian borrowers feel that the rupee is going to appreciate even more, they would surmise that the debt servicing cost in rupees would go down. This would make External Commercial Borrowings (ECB) more attractive, even at unchanged interest rate differential. On the other hand, if they believe that the rupee is overvalued and can fall , then the balance would tip the other way.

If the RBI wants to limit the appreciation of the rupee in the interest of exporters, it has to discourage ECB. Given the higher and rising interest rates in India, it is difficult to do so, unless the RBI puts more restrictions on ECB. But the RBI is unlikely to do this. For one, the Government wants to develop Mumbai as an international centre for financial services.

To achieve that goal, the central bank will have to gradually remove restrictions on international capital flows and move towards full capital account convertibility. In fact, the last Credit Policy further increased the limit for Indians investing abroad. The RBI is hoping that the additional inflows will be offset by more outflows as a result of the raised ceiling on foreign investments by Indians. However, this is unlikely to happen given the huge interest rate differential in favour of India. To the extent companies are using ECBs to finance capacity expansion, this would also help both growth and inflation control (by removing supply constraints) in the long run.

So, the RBI has a difficult policy choice at hand. In which direction it will move will depend on which objective — inflation control, maintaining export growth or capital account convertibility — is given more importance. Policy instruments — including the exchange rate — would naturally have to adjust as the weights assigned to different objectives change over time.

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The Indian Rupee closed at its highest level in a month on Monday, as exporters, including large software companies, repatriated profits, though gains were capped by an oil refiner that bought Dollars through the day. The Rupee ended at 40.65/66 a Dollar, off its intraday peak of 40.60 but at its highest finish since June 5. It had closed at 40.70/71 on Friday.

The Indian Rupee climbed to its highest level in a month on Tuesday as a record high in the stock market attracted foreign investment, but suspected central bank intervention drove it off its peak. The Rupee ended at 40.5500/5675 a Dollar, up smartly from Monday`s 40.65/66.

The Rupee ended at its strongest close in nine years on Wednesday, boosted by foreign buying of stocks, but gains were capped as the central bank and oil companies bought Dollars. The Rupee ended at 40.450/455 a Dollar, its strongest finish since May 1998, up from Tuesday`s 40.5500/5675.

The Indian Rupee rose to its strongest close in nine years on Thursday, supported by sustained capital flows, but suspected central bank intervention put the brakes on its gains during the day. The Rupee ended at 40.43/435 a Dollar, up from its previous close of 40.450/455 and its strongest close since May 1998. It hit a peak of 40.39 in early trade closing to a nine-year high of 40.28 set in late May, before Dollar buying by the central bank knocked it down to a low of 40.52.

Suspected central bank intervention drove the Indian Rupee into negative territory in late trade on Friday, after funds pouring into the record-setting stock market had lifted the currency towards nine-year highs. The Rupee ended at 40.46/47 a Dollar, easing from Thursday`s 40.43/435, and off an intraday high of 40.415.
A sharply appreciating Rupee vis-a-vis the US Dollar in which most of India`s exports are denominated has taken its toll in the month of May 2007 when exports increased by a modest 6.04% in Rupee terms over the corresponding month in 2006.

Even as the export growth in Dollar terms during May 2007, the latest monthly figure put out by the Department of Commerce based on provisional figures from the directorate general of commercial intelligence & statistics (DGCI&S), showed a relatively robust growth of 18.07% at USD 11.8 billion (USD 10.04 billion), the tepid growth of 6% in Rupee terms owed itself to the relentless appreciation of the Indian Rupee vis-a-vis the US Dollar.

Cumulatively, while exports during the first two months of the current fiscal amounted to USD 22.4 billion (USD 18.6 billion) showing a growth of 20.37%, imports during the period amounted to USD 35.7 billion (USD 26.8 billion) showing a growth of 33.05%.

Interestingly, oil imports during May 2007 were valued at USD 4,740.29 million which was close to 3% lower than oil imports valued at USD 4,886.44 million in the corresponding month of 2006. Despite the appreciating Rupee making the import cost relatively cheaper, the decline in import was attributed to the firming up of average crude prices which was quoted at USD 65.52 a barrel, against USD65.74 a barrel in the previous month.

With Rupee making import cost slightly cheaper, this is reflected in export-related imports embedded in non-oil imports which showed a sharp 41.58% growth in May 2007 at USD13.3 billion against USD9.42 billion in May 2006. Non-oil imports during the first two months of the current fiscal at USD 26.5 billion were higher 49.42% over USD 17.7 billion in April-May 2006.

Trade deficit during the first two months of the fiscal 2007-08 has shot up to USD 13.2 billion, against USD 8.2 billion during the corresponding months of 2006.Around a year ago, there was great rejoicing that the Sensex, after having collapsed from an all-time high, had recovered without the stock markets going into a bear phase. At that time, I had pointed out that the recovery was somewhat hollow as it was limited to the major stocks that dominate the large-company indices like the Sensex and the Nifty. If one ‘reset’ all indices to the Sensex’s level of 12,612 when it hit it’s peak on May 10, 2006, then the other indices were languishing at 9,000-10,000 levels when the Sensex was back above 12,000 in September. The moral of the story was that stocks of smaller companies had fallen much more than the big Sensex stocks and then had recovered much less.

Now, the Sensex and the Nifty are roughly in a similar situation, having come around from a previous high to a steep quick crash and then a full recovery. But is this recovery just as thin as last year’s or (to use a somewhat jinxed phrase), are things different this time? Let’s do the same exercise again. The markets hit a high on February 8, 2007. That day, the Sensex closed at 14,652. After that, in just 16 trading sessions, it dropped by 18% to 12,415. Let’s reset six indices -BSE 100, BSE 200, Nifty, Nifty Junior, CNX Midcap and BSE 500- to 14,652 on February 8 and see how they fared. Remarkably, none of them fell much more (or much less) than the Sensex. All the indices were within a range of 12,301 (BSE 200) to 12,456 (CNX Midcap).

The markets did not fall further and after a couple of false starts, the recovery began in earnest after April 2. Last week, the Sensex closed at 14,650, just a whisker less than the previous high. So are our ‘reset’ smaller indices doing any better this time? Remarkably, they are, and by positively impressive margins. In ascending order, the Nifty is at 14,981, the BSE 100 at 15,036, the BSE 200 at 15,087, the BSE 500 at 15,147, the CNX Midcap at 16,182 and the Nifty Junior at 16,978 is close to 17,000.

In general, I think it’s fair to say that during this period, the broader stock markets have done much better than what is being indicated by the Sensex or the Nifty. The general rule of smaller companies being worse off during volatile phases appears to have been suspended, at least for some time. I think this is great news. There could be many reasons for this -like big stocks were suffering from over-attention earlier- but those are all somewhat overwrought justifications. The simple fact is that whatever is happening to Indian stocks is now broad-based in a very meaningful sense.

Still, that doesn’t detract from the fact that we are at a sort of an inflection point. Over the last few months, Indian companies have been living under the impact of a rupee that is strengthening and rising interest rates. The next few weeks will see a spate of quarterly corporate results that will show us how well companies are coping with this twin threat. In fact, just the next week to ten days should be enough to give everyone an idea of how things will turn out. Despite the good news I’ve pointed to earlier, investors are always nervous at high levels and apt to turn tail at the slightest fright. I think the coming days could be a turning point of sorts and by mid-July we will have a definite idea of how resilient this story is.

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As American investors and speculators in precious metals and their miners, it is really easy to lapse into a provincial perspective. Although the American PM markets are certainly very important, there is a massive world out there beyond our country. The entire populace of the United States represents less than 5% of the world's people, and a similar tiny fraction of potential investors.

We Americans have been incredibly blessed with unparalleled per-capita wealth, and it is great to see other nations around the world thriving economically too. In any country more free enterprise ultimately leads to better standards of living and more surplus capital to invest. Some of this capital will certainly find its way into gold, the ultimate long-term investment throughout human history.

And even though per-capita levels of investment outside the US generally remain small by American standards, since those living outside the US outnumber Americans by over 22 to 1 they will collectively have a huge impact in the world markets. So it is important for us to try to understand how gold is perceived outside of the United States .

As every speculator knows, it is price action that shapes perspective. When prices are high and rising, people get excited and want to deploy more capital. When prices are low and falling, people get bored or scared and walk away in disgust. So by viewing gold through the lenses of major local currencies worldwide, we can get a good idea of how locals are likely to perceive it and whether they are likely to buy or sell.

I have been using ten major currencies to track gold's bull-to-date progress. They span every populated continent and encompass how the vast majority of the world's population views gold. Some currencies are obvious choices, like China 's and India 's since they represent such huge populations. Other currencies, like Brazil 's and South Africa 's, were chosen because they are leading regional currencies on their respective continents.

In years past these charts have covered the entire gold bull to date, but this time I zoomed in to the last two-and-a-half years to increase our resolution on current technicals.

These charts also have a few peculiarities of which you should be aware. First, the gold prices are forex-implied, they are not true local gold quotes. Unfortunately actual local gold-price histories from around the world are notoriously difficult to find. Thankfully they are not necessary though due to the way the gold markets trade around the world today.

Since the US dollar has been the world's reserve currency for decades now, the dollar gold price still dominates world gold trading for the time being. Virtually everywhere on the planet, the local gold price is still a function of the dollar gold price and the exchange rate between the local currency and the dollar. These forex-implied gold prices are not perfect, but in my experience they're very close. Periodically over the last six years I have spot-checked true local prices with forex-implied prices and found them well within 1% of each other.

Second, in all these charts a rising red currency-exchange-rate line means that the local currency is gaining in value against the US dollar. A falling currency line means it is losing value against the dollar. In order to make all these charts consistent, in some cases I had to use the inverse of customary currency quotations. For example, the Japanese yen is always quoted in yen per dollar. But if charted this way, a rising yen would mean a falling chart line. This is counterintuitive, so I changed all exchange rates to the dollar cost per local unit of currency.

Finally, all gold prices are in local currency per troy ounce , even if this is not the local custom. Gold in Asia , for example, is typically quoted in price per gram on local exchanges. But in the West we are used to seeing gold prices quoted in troy ounces. In order to keep all these prices and charts consistent and comparable, all gold prices are rendered in local currency units per troy ounce regardless of custom.

After building all these charts to examine global gold technicals since 2005, some common themes emerged that you should keep in mind while you look at these charts. First, gold enjoyed a massive upleg from mid-2005 to mid-2006, the mightiest of this bull market by far. Since this upleg culminated in the major interim highs of May 2006, gold has been consolidating in tightening wedges between support and resistance all over the world.

While this long consolidation has certainly tested the patience and commitment of PM traders, it is really very bullish. Across the globe gold is now trading at high levels that would have been considered a nearly impossible dream only a couple years ago. But today these same high levels, since we have seen them for over a year now, seem routine and boring! This consolidation is acclimatizing traders around the globe to considering today's prices as normal . It is building a rock-solid base from which the next major upleg will soar heavenwards.

As these wedge-shaped consolidations all over the world tighten, gold will soon have to break out one way or the other. With the fundamentals still remaining so bullish, and it suffering through such negative sentiment today, the odds heavily favor this breakout happening to the upside. So as you digest these charts, look at the parallels between gold in these major currencies and realize the high consolidations are forming new bases to support gold's next big upleg.

Since the US dollar gold price still dominates the global gold market for the time being, this is the reference chart off of which all others should be compared. From February 2005 to May 2006, gold soared a breathtaking 75% in dollar terms.

Although even American gold enthusiasts are generally despairing and negative today, this chart is really impressive. Gold has been climbing higher on balance since early 2006 as its rising support line shows. Resistance is descending to create a consolidation wedge, but this is only because of May 2006's euphoric surge. If that short-lived surge is erased, gold would actually be within a nice uptrend channel today.

In any case, the highest-probability-for-success time to buy any asset within a secular bull is when its price temporarily falls back down to its 200-day moving average and support. Today gold is in just such a bullish place. It is from situations like today's, where gold is unloved and languishing low technically, that mighty uplegs launch. Note above that gold traded sideways throughout most of 2005, consolidating like today, before it soared in its biggest upleg of this bull. Consolidations precede big uplegs.

Finally, note the US Dollar Index here, the red line. Since late 2005 the dollar's secular bear market has reasserted itself and dragged the dollar down another 12%. The dollar is so low today that it is within spitting distance of hitting multi-decade highs. And since there are few things better for gold than a loss of faith in major fiat currencies, the USDX tracking under 80 should lead to a major boost in global gold investment demand.

The Canadian dollar is thriving on the relentless US dollar weakness. Just this week, it came within a penny of hitting a 30-year high versus the ailing US dollar! Although the strengthening Canadian dollar ate up some of the gains in US-dollar gold, Canada gold is still up 56% since early 2005. Provocatively it just made a new high back in late February of this year that even slightly exceeded its May 2006 high. So Canadian gold investors haven't had to wait as long for new bull-to-date gold highs as the rest of the world.

Despite the wild currency fluctuations, the same key technical pattern is readily evident in Canada gold. It has been consolidating sideways for over a year now, its rising support creating a wedge. This is getting Canadian gold investors comfortable with the idea of C$700 to C$800 gold being the new normal range. It is from this base created by this consolidation that the next major gold upleg will launch. And with Canada gold at its support and under its 200dma, it is a great time for Canadians to buy gold.

Brazil 's currency has soared over the last couple years, up an incredible 46% against the US dollar. This has certainly neutralized some of dollar gold's gains, but real gold has still had an awesome 55% run. Brazil gold has been coiling in a tightening wedge too, and intriguingly it is the only one of these currencies where gold has apparently broken out to the downside . A recent surge in the Brazilian real drove gold lower under support. But I suspect this downside gold action will be short-lived, as the overdue global gold rally will quickly push Brazil gold back up into its wedge.

The gains in euro gold over the last couple years have been amazing, 76%! Since the euro-block countries contain around 8% of the world's population, and since European investors are so wealthy in a per-capita sense compared to most of the world, and since Europeans have long had a solid cultural affinity for gold, I think this euro gold price is extremely important. When euro gold breaks out of its wedge and powers higher, European investors could really accelerate this upleg as they chase gold.

While euro gold is down under its 200dma and at its support today, the narrowing mouth of its consolidation wedge is the tightest out of all these currencies. This means that euro gold will have to break out soon, one way or the other. Just like euro gold back in June 2005 announced the birth of the much more powerful Stage Two gold bull, it could again be a euro gold breakout above this wedge that triggers enough European buying to ignite the next major upleg.

With the euro itself near an all-time high against the US dollar, Europeans are going to be getting more and more nervous about their US investments. Currency losses can quickly crush any gains achieved overseas. What better place than gold to park capital if fears of big dollar losses and new all-time lows start to grow in popularity.

Interestingly UK gold is in a very similar position to euro gold. While the pound has soared 18% versus the dollar since late 2005, UK gold still managed a massive 73% run higher between early 2005 to mid-2006. The same currency-crisis dynamics should affect British investor thinking too, as the pound just made a 26-year high versus the US dollar. If British investors see further gains in the pound, they are going to be less comfortable owning US stocks and bonds and may start buying gold instead.

All these multi-decade currency highs relative to the dollar ought to frighten the US Fed and Washington. Fiat-paper currency is a very fragile thing based on nothing but faith in the issuing government. It is quite literally a confidence game. If the Fed keeps printing money like there is no tomorrow and the dollar keeps falling to new all-time lows, it really could create a crisis of confidence in which gold will thrive.

If the US Fed wants lessons on how to utterly destroy a currency, it can look to Japan . Despite the latest downleg in the secular US dollar bear, the Bank of Japan still managed to create an impressive 18% loss in the yen relative to the dollar. It's a race to worthlessness! Naturally this has made gold look exceptionally strong in Japan , up 92% since early 2005. And yen gold just made its latest bull-to-date high in mid-April. While it has indeed been consolidating, the eroding yen has created a rising wedge in Japan gold.

Japan is destroying its own currency through irrationally low interest rates and excessive money-supply growth in order to subsidize its export industry. This is incredibly stupid. Free markets only thrive when monetary policy doesn't play favorites between savers and debtors. Since savers are getting slaughtered in Japan , more and more are flocking to the immutable stability of gold. The spark that ignites the next global gold upleg could very well prove to be Japanese investors starting a heavier migration into gold to protect their enormous savings.

As a student of the markets, I find this China gold chart the most intriguing of all. For a decade or so ending in July 2005, the yuan was pegged to the US dollar. So up until this point the yuan gold bull was a perfect mirror of the dollar gold bull. But since the yuan was quasi-freed to float a bit, it is up 9%. This strength is eroding some of dollar gold's gains in yuan terms, but yuan gold still shot 69% higher in its last major upleg. It is also at support and under its 200dma today, the ideal time to buy technically.

China is especially interesting today in gold terms because its stock-market bubble is imploding, resembling the NASDAQ in 2000 remarkably well. In the West when investors face a stock bubble bursting, some flock to gold as a safe haven of protection from the turbulent stock markets. And since the Chinese have a much deeper cultural affinity for gold than we Americans will ever have, I suspect they will pile into gold once their accelerating stock slide starts really scaring them.

If this happens, overall global gold investment demand will really start growing. The Chinese investors sure aren't rich by American standards, but there are so many of them that the capital they collectively control is massive. Coincidentally, the Shanghai Gold Exchange is launching a new gold-trading service for individual investors that will make it far easier for Chinese investors to buy and keep physical gold. And with Chinas Gold Technicals looking gorgeous regardless of stock-market action, Chinese gold demand should really start to grow and help drive up world gold prices.

While the Chinese have liked gold forever, I don't think anyone loves it more than the Indians. Gold is such a huge part of Indian culture that it is probably the world's biggest growth market for gold investment demand. And with India gold up 80% in the last major upleg, Indian investors are paying attention. Rupee gold is also in a wedge, and it is tightening just like the other wedges and will soon break out. If the Americans, or Europeans, or Japanese, or Chinese start buying, rupee gold will soar in short order.

And interestingly Indian wedding season is approaching at the end of summer, after the harvest. Gold is a huge part of these marriage rituals as wealth in the form of dowries is often converted into beautiful gold jewelry for the brides. While in the States we tend to separate jewelry gold from investment gold, in India jewelry often serves as investment. With Indian gold demand on the verge of its usual seasonal surge and looking very bullish technically under its 200dma, Indian investors will be buying gold too.

Since the Aussie dollar has been so strong over the past year or so, the Australia gold wedge is much flatter than most other countries' wedges. With a dead-flat support line around A$760, Australians have had a tougher time psychologically in this consolidation than Americans. At least our support line has been rising which is a subtle confirmation of bullish underlying technicals. But this weakness has made gold an even better buy in Australia in technical terms than it is in much of the rest of the world.

And Australian investors are much more likely to buy gold than American investors. It is just more accepted down under since such a big fraction of Australia 's economy and exports is driven by the natural-resources industry. So despite the flat Australia gold support, the necessary gains to drive renewed interest in investing in gold won't need to be as great as in the States where gold is still largely reviled by the mainstream.

Finally I'd like to close with South Africa , which has the strongest currency on a continent full of incredible inflation and fiat-currency destruction. Yet despite South Africa 's relative strength and natural-resource-intensive economy, its Marxist government has somehow managed to drive the rand even lower versus the falling dollar. This certainly isn't easy, as only the Japanese government has had similar success in debasing its own currency.

Because of these ongoing rand problems, the 103% gain in rand gold since early 2005 is the best of all these major currencies. While Africa 's investment community is not very large, it naturally gravitates to gold since the continent's fiat currencies are such a mess. Right now South African investors have a rare opportunity to buy gold under its 200dma and at support, the best time within a secular bull.

Once again with these ten charts digested, major themes exist in gold that are common all over the world. Gold soared in a massive upleg ending in mid-2006. Since then gold has been consolidating, generally grinding sideways. This consolidation has gutted sentiment and made traders really negative on gold, but it is really quite bullish. It has convinced traders that today's gold prices are the new norm, so once they start buying again gold will launch much higher from here.

Within any secular bull driven by a continuing worldwide supply-and-demand deficit, the very best times to buy in probability terms are just like today. Prices fall under their 200dmas and down to support, and sentiment remains pretty bearish since there haven't been any serious price gains in some time to attract in the momentum-seeking bulls. All over the world today we are seeing this, great gold prices in technical terms coupled with lackluster sentiment that cannot persist.