Currency dealers say remarkable rupee stability can be misleading

The Indian rupee has shown remarkable stability in the last few trading sessions even as important global events continued unabated, the latest being the coup attempt in Turkey after the all important British referendum to exit the European Union.

In fact, currency dealers say, rupee would be appreciated sharply but for the Reserve Bank of India (RBI), which has been shoring up its reserves at every level whenever rupee is strengthening below the 67 a dollar level. As on the week ended 15 July, India’s foreign exchange reserves improved 1.4 billion to $363.35 billion, close to its record high level of $363.83 billion.

The Indian rupee has been trading in and around 67 a dollar level in the last 10 trading sessions and currency dealers expect the local currency to continue with its stability in the coming few weeks even as they warn their clients not to take it for granted and hedge cautiously. Rupee closed at 67.08 a dollar on Friday.

“We are advising exporters not to cover aggressively, but we are telling our import clients to hedge for one to three months,” said Abhishedk Goenka, managing director at IFA Global.

According to Goenka, there is some amount of euphoria about the Goods and Services Tax (GST) Bill getting passed in the coming Parliament session, while the global market has also not reacted much after the Brexit referendum and Turkey uncertainty.

Except for pound sterling, other global currencies have more or less held their ground against the dollar even as precious metals like gold and silver have had a steady performance in the period.

However, there is a lingering doubt that rupee may not continue with this stability.

“I think we are in the bellow end of the curve. Rupee has a depreciating bias and it should reach 70-71 level in a year’s time,” Goenka said.

According to a senior currency dealer with a foreign bank, rupee could maintain its stability for the next one month.

“RBI is keeping the rupee in the narrow band of 66.5067.40 level and it would unlikely want the rupee to go beyond that as we are not very far from the record low levels. Beyond that, it’s an uncharted territory,” the currency dealer said without wanting to be identified as he is barred from interacting with the media.

Rupee reached its record low of 68.85 a dollar on 28 August 2013.

However, Samir Lodha, managing director of Quant-Art Market Solutins, a treasury consultant, thinks that rupee’ s stability could be giving a wrong signal and it could just be the calm before the storm.

“Rupee’s stability now is because of the absence of a trigger. The moment a trigger gets activated, rupee would depreciate sharply. Besides, the FCNR (B) redemptions in September is good enough reason for the rupee to breach its record lows,” said Lodha.

RBI expects dollar outflow of about $20 billion due to the redemptions of foreign currency non-resident bonds in September. These bonds were raised in SeptemberNovember 2013 to stem the fall in rupee. About $35 billon of bonds were mobilised, with some being leveraged investment.