Portfolio flows prop up rupee
The continuation of quantitative easing in the West has led to the rise in emerging market currencies, including the rupee. ANUP ROY reports
The recent strength of the rupee, up 5.5 per cent against the dollar since January, could be a reflection of the growth in Indian economy, said Nirmala Sitharaman, minister of state for commerce and industry, on Sunday.
But the rupee is not the only currency to strengthen against the dollar over the period. The rupee is not the highest gaining currency in Asia. At about 7.9 per cent, the yen has appreciated the most in Asia, followed by the Taiwanese dollar at 6.39 per cent and South Korean won at 6.28 per cent.
The rupee closed at 64.52 to a dollar on Monday, down from its previous close of 64.41. In the year to date, the rupee has strengthened 5.50 per cent.
The real effective exchange rate (REER) of the rupee in the 36-currency basket was 119.50 at the end of March, up from the February level of 117.49. A year ago, the REER was 112.96.
At the end of November, when demonetisation had hit business sentiment, the REER was 117.46.
The continuation of quantitative easing in the West has led to the rise in emerging market currencies, including the rupee.
The dollar, too, is losing value against major currencies. The dollar index, which measures the greenback’s strength, closed at 100.41, against its February end level of over 102.
“The rupee will most definitely be driven by foreign portfolio investments in the equity and debt markets as the other fundamentals are unlikely to change significantly. Assuming that FPI continues to flow in the next three months, the rupee will be range-bound in 64-65 before moving back,” CARE Ratings Chief Economist Madan Sabnavis wrote in a recent report.
Foreign investors were essentially sellers in the Indian market in 2016. However, they turned unusually bullish in March and April. A record $9.1 billion entered the markets in bonds and equity in March, of which $5.1 billion went into equity.
Bond yields fell and equity indices rose sharply.
In April, foreigners bought $6.62 billion in Indian equity and $6.48 billion in debt.
Portfolio investments can reverse if the geopolitical situation turns volatile. The dollar will strengthen and emerging market currencies will fall, irrespective of the strength of the local economy.