BS POLL: Upward pressure now on the rupee

Global banks note India's better finances; however, poll respondents expect rise to be capped, with RBI wishing to boost reserves

The rupee, which appreciated to a near three-month high on Thursday, is likely to gain some more strength but the upside is capped since the central bank would like to use the opportunity to boost its foreign exchange reserves.

The median forecast in a Business Standard poll of 10 currency experts on Thursday says the rupee is expected to trade at 61.10 a dollar in a month.

It ended at a near three-month high of 61.12 compared with Wednesday’s close of 61.76 a dollar. The rupee had ended at 61.04 a dollar on December 10. In percentage terms, it appreciated by 1.04 per cent on Thursday; during intra-day trade, it touched a high of 61.11 a dollar.

“Today's rally in the rupee is due to bullish equities. There were inflows from foreign institutional investors in the stock market which helped the rupee. The current account deficit (CAD) figures released Wednesday was also very positive for the rupee,” said Suresh Nair, director at ADMISI Forex India.

The CAD narrowed to a fresh four-year low as gold imports declined, offering a potential boost for the rupee. The deficit was $4.2 billion in the October-December quarter, compared with $5.2 billion for the previous  quarter, the Reserve Bank of India (RBI) stated on Wednesday.

The Real Effective Exchange Rate or REER — weighted average of India's currency relative to an index or basket of other major currencies, adjusted for inflation — has been decreasing from the levels seen at the start of the financial year. The REER is a six- currency trade-based weight, constituted  in December 2005. It was at 106.90 in April last year and 96.22 in January, shows Bloomberg data. It was at 90.83 in August, when the rupee touched a record low. The new six currency indices represent the US, the euro zone, Britain, Japan, China and Hong Kong.

“The rupee has strengthened more than what we would have expected, given the global circumstances. We believe at some point, RBI will start buying dollars to boost reserves. In the case of risks like a general emerging market sell-off, poor election results or maybe a Ukraine-like situation, the currency weakness overshoot also tends to be higher if the starting point is stronger than warranted as was the case last year. I will be surprised if RBI allows the rupee to appreciate materially below 60 a dollar before the elections,” said Brijen Puri, executive director and head of markets, JPMorgan.

Since August 28, when the rupee had touched an all-time low of 68.85 a dollar, it has appreciated 11 per cent. According to Moses Harding, group chief executive officer (liability and treasury management) & chief economist at Srei Infrastructure Finance, the rupee could be at 60.50 to a dollar in a month. “Foreign flows are attracted towards economies with low CAD and inflation, and sustainable growth momentum. India is seen to have taken control of the CAD and inflation, with signs of recovery in growth; hence, the shift of preference to India from other emerging markets, with higher allocation of funds to Indian asset markets,” he said.

Global banks are recommending buying the rupee, compared with a range of emerging market currencies, to benefit from Asia’s highest yields as India’s finances improve. Some days earlier, HSBC Holdings Plc advised purchasing India’s currency and selling Indonesia’s rupiah. Besides, Deutsche Bank AG and Morgan Stanley favoured the rupee against Brazil’s real.