Re may extend gains as inflows rise

The rupee might extend the trend of its strengthening on the back of overseas inflows, bankers and dealers said. The currency, which rose to Rs 45.59 to a dollar today from Rs 45.68 per dollar yesterday, may continue with its gaining momentum as overseas investors pump in more investments in Indian stocks.

Rising stocks and likely initial share sales by companies could increase inflows, said a dealer with a foreign bank. He expects the rupee to continue gaining up to Rs 45 per dollar level. He didn’t say when the level could be attained.

Foreign institutional investors have invested $16.4 billion in local stocks since January 1, and $9.4 billion in bonds up to September 21, according to data compiled by the Securities and Exchange Board of India. The figure is higher than overseas funds purchase of $17.5 billion equities and $1.1 billion of bonds in 2009.

Some fund managers predict the rally in local stocks may stretch further as overseas investors see Indian economy, among other emerging market economies, as a safe haven for earning higher returns on their investments. The Bombay Stock Exchange’s benchmark index or Sensex, which crossed 20,000-mark yesterday for the first time since January 2008, today shed 60 points to close at 19,941.72. The outlook for returns from the US and European markets doesn’t look very optimistic, they say.

“The rupee has been appreciating because of bunching up of inflows coupled with dollar weakness against the Euro, Yen and the British Pound,” said Hitendra Dave, managing director and head of global markets at HSBC in Mumbai.

“In the short run, we may see its rally sustaining because of easing of monetary policy in the US, which may increase dollars in the system. Beyond October-November, it will depend on if the US Fed goes for quantitative easing and if the RBI raises rates further.”

The rupee is currently trading at a four-month high. On May 18, the currency traded at 45.59 per dollar. Still, the currency has gained about two per cent since the beginning of the year. The rupee, which was at 46.62 per dollar on January 1, dropped to a low of 47.70 per dollar on May 25.

“From a macroeconomic view, managing inflows and inflation in a growing economy remains a challenge for several central banks across Asia,” said Jayesh Mehta, managing director and country treasurer, Bank of America. “In the short term, we expect the rupee to be in a range of two rupees either way. Our research forecast is for the rupee trading at 43.50 per dollar by March.’’

One of the reasons for the rupee to gain is the absence of the Reserve Bank of India’s (RBI’s) dollar purchase from the open market. RBI has not intervened over the past eight months to July, according to the data available on RBI’s website.

The central bank faces twin issues of ensuring an orderly movement of the currency and preventing any sharp appreciation, while also avoiding buying the dollar for the fear of increasing supply of rupees in the local market just as it tries to keep inflation under check. The central bank is not averse to overseas inflows that are critical for economic growth as long as it doesn’t disrupt the local market.

“On the external front, the continuing sluggishness of the global economy constrains export growth, while the strong domestic recovery has increased demand for imports. As a result, the trade deficit, and with it the current account deficit, are widening,” RBI said in its mid-quarter monetary policy review on September 16.

The risk of volatile inflows would reduce as the advanced economies stabilise, resulting in a steady increase in flows to emerging markets including India, RBI said.

While dealers concede that a high current account deficit will neutralise the overseas flows to an extent, dealers say the momentum at present favours the rupee to gain from the current levels.