The rupee is expected to retain the current level with the help of foreign fund inflows in the medium term, as narrowing trade deficit data augur well for the currency. However, downward risk remains high in the event of fresh risk-off waves from developments on the global front.
On Friday, the rupee closed at 55.15 against the dollar, registering a third consecutive weekly gain of 0.6 per cent. “There were good dollar supplies from exporters and FIIs above 55.70 to dilute the impact of strong dollar rally against major currencies. Else, the rupee would have been down and out around 56.50 by now,” said Moses Harding, head of ALCO and economic & market research at IndusInd Bank. He expects the rupee to trade in the range of 55.30-55.95 against the dollar for the near term.
The rupee gained 1.4 per cent over the previous close even as the dollar index, as measured against six major currencies, stayed above 83.65 levels on Friday. There have been net foreign fund inflows worth $1.6 billion in Indian equities and debt markets this month so far, according to data from the Securities and Exchange Board of India.
In June, India’s trade deficit shrunk to a 15-month low of $10.3 billion from $16.3 billion in May, as imports contracted on a faster pace compared to the slowdown in exports. “In our view, while lower oil prices are partly responsible for the drop in the oil import bill, rupee depreciation is starting to narrow the non-oil import bill. Gold imports are also down as a result,” said Sonal Varma, chief economist at Nomura.
“The trade deficit in the coming months, if sustained at the current level, could progressively lead to a gradual appreciation in the exchange rate,” said Param Sarma, director and chief executive officer of NSP Treasury Risk Management Services.
Traders will also look at the wholesale price index (WPI) for June 2012 that will be released on Monday for cues on the possibility of rate cuts in the upcoming monetary policy review.
Bond yields may harden as the overall inflation is expected to be sticky. ICICI Securities has estimated the WPI at 7.82 per cent in June, higher than 7.55 per cent in May and 7.23 per cent in April 2012. On Friday, yields on the 10-year benchmark government bond closed at 8.1 per cent.
The Reserve Bank of India is scheduled to announce the first quarter monetary and credit policy on July 31. The central bank had kept the repo rate and cash reserve ratio unchanged in the mid-quarter policy review in June, citing upside risks to inflation.