Rupee to gain more, but at a slower pace
CASH AND CARRY Currency closes at 2year high of 63.69 against greenback; foreign inflows, weak dollar to aid gains
MUMBAI: The rupee, which hit a fresh two-year high on Thursday, is expected to strengthen further owing to continued foreign fund inflows and dollar weakness, but the pace of the rise is likely to be slower, dealers said.
In a large part, the pace will be determined by the central bank’s intervention in the currency market, they said. The Reserve Bank of India has maintained that it does not target a particular level for the rupee and its intervention in the currency market is only to curb excessive volatility.
On Thursday, the rupee closed at 63.69 a dollar, one paise higher than the previous close and its highest level since 22 July 2015.
“Apart from the FPI inflows and dollar weakness, exporters are selling dollars on a large scale. The rupee will remain steady with a positive bias at least for three to four months,” said Harihar Krishnamoorthy, treasurer at FirstRand Bank.
The rise in the rupee has been due to surging inflows from foreign portfolio investors (FPI) into the local equity and debt market on the back a positive view on the Indian economy. In addition, the recent fall in the dollar index to a multi-month low has also led to a rise in rupee in line with its Asian peers. Recently, the dollar weakened against most global currencies because of uncertainty related to interest hike in the US and President Donald Trump’s administration.
So far this year, the Indian currency has gained by 6.64% against the dollar, while Asian currencies, barring the Hong Kong dollar and Philippine peso, have gained in the range of 1.1-7.7%.
FPIs bought $ 8.84 billion and $17.87 billion in equity and debt markets, respectively, so far in 2017.
On Thursday, the dollar index, which measures the US currency’s strength against major currencies, had fallen to 92.91.
Now with FPIs having nearly exhausted investment limits in the local debt market, inflows into equity and a weaker dollar globally are seen the supportive factors for the rupee. The rise in the rupee is also expected to be slow because it is overvalued as seen from the real effective exchange rate (REER), a measure for currency’s valuation.
However, the RBI’s role in sterilising dollar inflows may decide the fate of the rupee. The RBI has been intervening in the market since June in order to arrest sharp appreciation of the rupee, a fact derived from the rising forex reserves which have swelled to a record $391 billion.
The intervention by the central bank in the spot currency market is limited because of surplus liquidity conditions; RBI had to absorb a net ₹3 lakh crore on an average daily in July under its liquidity adjustment facility.
Thus, when the RBI purchases dollars in the market, it infuses fresh rupees, thereby adding to surplus liquidity. In order to avoid this, the RBI has been also entering into forward contract to negate such impact. However, this route has limitations and hence the central bank may not find it desirable to continue to do so to a large extend, dealers said.
According to Sajal Gupta, head of forex and rates at Edelweiss Securities, at time when the Asian currencies are appreciating, RBI may not aggressively intervene to arrest rise in the rupee. He sees the rupee potentially rising to 62.80 a dollar in the next three month.