Rupee strengthens below the 70-a-dollar mark, builds buffer for RBI

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Rupee has strengthened below the 70-a-dollar mark, and is building up a buffer for the central bank to operate in, should there be volatility in the markets in the run-up to the Lok Sabha elections.

At its Tuesday’s closing of 69.71 a dollar, the currency is well buffered from its record low of 74.15. According to currency dealers, keeping the rupee slightly stronger aids the central bank in supplying dollars and stabilise the currency, if there is a selling pressure threatening to erode the value of the rupee rapidly.

Year to date, the rupee has appreciated 0.08 per cent against the dollar, its first year-till-date gain this year. Still it is lagging its peers in Asia, pushing up hope that the local currency will have enough room to appreciate going forward. But the movement of rupee is still within a band maintained by the central bank.

“The rupee will have to depreciate 2-3 per cent as a natural course, but till the elections, the RBI may want to keep it a little stronger,” said Abhishek Goenka, managing director and CEO of IFA Global, currency consultant.

Generally, the central bank intervenes when the rupee loses or appreciates sharply, but the central bank has been largely absent from the market in the last two days after the Election Commission announced the election dates. India’s foreign exchange reserve has again touched $400 billion, as the RBI bought dollars when the rupee appreciated.

 

Currency dealers say there is a positive sentiment prevalent in the market after election dates were announced. Besides, the voluntary retention route (VRR) announced for foreign portfolio investors (FPIs) in the debt market has also been received well by the players. The VRR cuts down mandatory holding period of bonds to one year, from the earlier three years. On Monday, when the VRR scheme started, FPIs poured in Rs 2,500 crore worth of their money in the bond market.

According to a bank treasurer, most of the money coming to India now is unhedged, as foreign investors are certain that rupee won’t move much and the corporate bond market offers high returns of 8.5 per cent. Also, this is a good time for the rupee to appreciate as the outlook for global rates is bearish. This is also reflecting in the domestic bond yields, which are not rising in anticipation of global soft rates, which should reflect in India as well.

“Fed dovishness is reflecting in dollar, euro is also very dovish, while oil prices are holding steady. This is a very good period for emerging market currencies to rally, and rupee can appreciate much more, only if the RBI lets it be,” said the bank treasurer without wanting to get quoted.

Goenka said he was advising his importer clients to buy dollars at the present level, while he was offering options to his exporter clients, but not necessarily forwards.

Goenka desn’t expect rupee to appreciate beyond 69.50 a dollar.