Rupee rides on strong economic fundamentals

Though there would be the inevitable pressure on exports, the inflow of foreign funds of a record magnitude with their consequent effect on the rupee hitting its 20-month high in relation to the US dollar, the Euro, the British pound, the Japanese yen is on balance a positive development for India. It is indeed a reflection of growing confidence in the Indian economy in the wake of the country’s strong economic fundamentals and the spectacular showing of the BJP, the ruling party at the Centre, in the recent round of State elections. What has strengthened investor confidence is also the Central government’s resolve to push through tough economic reforms like the GST, and the Reserve Bank’s stand of not intervening in the forex market. Doubts about sustained growth of the US economy have also contributed to the strengthening of the rupee. The current rate of Rs 64.28 to a dollar, Rs 68.33 to a Euro, Rs 79.81 to a British pound and Rs 58.01 to a yen as of Friday last reflects a sizeable gain for the Indian currency.

Analysts expect the rupee to strengthen further in coming days with the economic fundamentals unlikely to change for the worse. So far in 2017 aggregate net Foreign Portfolio Investment inflow through debt and equity is US$ 12.6 billion as against $787 in 2016. A feature of the new positive trend is that despite the rupee’s fast appreciation in recent months, the RBI has not intervened in the forex market. The prime reason for it apparently is that any intervention to stem the rupee appreciation will infuse more liquidity into the market at a time when there already is excessive liquidity. The fact that exports instead of declining on rupee upswing have actually gone up is also a factor that made RBI take the decision not to intervene. The country will indeed need to watch out for any escalation of the American attacks on Syria which could trigger oil production cuts and higher import bill for countries like India which are heavily dependent on import of petroleum products. Another fallout of the rupee strengthening could be that the pressure on interest rates could ease due to lower import bills and lower imported inflation. As it stands, certain sectors like capital goods, mobile phones, LCDs and computers would stand to benefit from rupee appreciation while IT, pharma, textiles and garments would be adversely affected.