RBI appears more tolerant of currency strength
Muscular rupee set to touch new high against dollar, say experts

The rupee has been rallying this year on the back of high real interest rates in India as opposed to zero or negative real interest rate across the world. While surplus global liquidity has aided the rupee’s rise, a weak dollar has also helped. With inflation under control, growth prospects improving, political stability, macro economic indicators looking good, implementation of GST and bankruptcy reforms and lastly high real interest rates, foreign investors continue to pump money in the domestic capital market leading to a gradual appreciation of the rupee against the US dollar.

The rupee has been one of the best regional performers this year. It has already touched a two-year high of 63.58 against the dollar, and is up 6.8 per cent so far this year. (Bloomberg Intelligence predicts a 9.7 per cent gain in rupee by March  2018).

If the forex inflows continue the trend in the current month, analysts expect the rupee to appreciate on the back of a weak dollar and domestic positives provided the central bank does not intervene aggressively to control its appreciation.

Take for instance this month, post the RBI monetary policy on August 2, Foreign Portfolio Investors (FPIs) have pumped in Rs 5,066 crore in both debt and equity in just five trading sessions till Monday. This is despite the central bank cutting the repo rate – the rate at which it lends money to banks – by 0.25 per cent. However it continued to maintain a neutral stance providing comfort to the foreign investors.

Since January, FPI investments in both debt and equity have been Rs 1.75 lakh crore. As per the latest RBI data, the forex reserves as on July 28, 2017 stood at $392.9 billion which has been providing comfort to the investors that the central bank has the required ammunition to intervene and control any excess depreciation in case of sudden outflows.

Says Abhishek Goenka, founder and chief executive officer of India Forex Advisors, “The outlook for the rupee remains strong. We expect it to trade between 63.30 to 64.20 levels this month. While we have seen short term corrections for the US dollar internationally, the impact for the rupee remains limited as it has been offset by the huge amount of foreign inflows. The concern on current account deficit front would be taken care of by these inflows.”

“We find exporters coming in the market whenever there is a new rise in the pair, selling medium term to long term forward hedges while the import flows remain limited with regards to hedges,” added Goenka.

Mark Mobius, executive chairman of Templeton Emerging Markets Group at Franklin Templeton Investments expects the rupee to continue to appreciate. “I see the Indian rupee continuing to get stronger and probably hit Rs 60 against the US dollar by the end of the year on the back of growth in India, strong and rising reserves. If you look at the price parity in India, it is not overvalued,” Mobius said in a reported interview.

Harihar Krishnamoorthy, Treasury, FirstBank India said, “The rupee seems to have found a resistance level at 63.50. This month, it may trade between 63.50 to 64.50 levels.”

On Monday, the rupee faced a temporary hitch and retracted from its two-year high to close at 63.80 a dollar by tumbling 22 paise after the four-day strong rally lost momentum on sharp recovery of the US currency. The domestic unit resumed with a gap-down at 63.71 from last weekend close of 63.58 at the Interbank Foreign Exchange (forex) market on fresh bouts of dollar demand from banks and importers. The rupee hit a low of 63.85 towards the fag-end trade before concluding at 63.80. The dollar index, which measures the greenback’s value against a basket of six major currencies, rose marginally to 93.37.

A Bloomberg report says: There’s no stopping the rupee. Strategists say Asia’s best-performing currency of the past six months could climb further as the Reserve Bank of India’s interest-rate cut lures more inflows into local shares. The rupee reached a two-year high after the RBI’s decision Wednesday, and Bloomberg Intelligence predicts the currency to further strengthen to 61 per dollar by March next year.

“The break in USD/INR below 64 suggests that the RBI will not be standing in the way of any increase in inflows, which could lead to some further near-term rupee appreciation,” said Khoon Goh, Singapore-based head of Asia research at Australia & New Zealand Banking Group Ltd. “Economic and political stability and reform momentum are attracting strong inflows, which will mean the rupee is set to continue appreciating,” said Abhishek Gupta, India economist at Bloomberg Intelligence in Mumbai. “Attraction for India’s debt market is based on factors such as a higher risk-free rate of return, a strong currency and possibility for further rate cuts.”