Rupee at 20-week high but market concern at volatility

Increase in capital inflows & weakening of the dollar aid currency appreciation

The rupee on Thursday touched a 20-week high of Rs 53 to a dollar. While the revival is welcome, experts say sharp appreciation in the exchange rate might not be helpful. According to market participants, the currency should hover around its fundamental value, reflecting the current account situation of the country.

“If the currency moves away from the fundamentals, the correction may also take place sharply when sentiments change,” said Hitendra Dave, managing director, head of global markets, India at Hongkong and Shanghai Banking Corporation (HSBC). He said India needs to build on foreign exchange reserves, which serve as a cushion against a global financial crisis.

Even as the rupee is appreciating, markets expect the Reserve Bank of India (RBI) to step in and keep a check on volatility. Indranil Sengupta, India economist at Bank of America Merrill Lynch, said the central bank is likely to recoup the $65 billion of foreign exchange reserves if risk-on drives in capital flows.

The RBI sold dollars worth $21 billion in the foreign exchange spot market from September 2011 to July 2012 to curtail volatility in the exchange rate. On its way down, the rupee lost about 30 per cent in 11 months since August 2011 and fell to a record low of Rs 57.16 per dollar. Thereafter, the Indian currency has gained seven per cent, marked with close to two per cent intra-day gains in two separate sessions.

“The near-term target is Rs 52 and short-term target Rs 49 against the dollar. Thereafter, if political, economic and monetary dynamics stay positive, the rupee should extend its gains to somewhere between Rs 48.60 and Rs 43.85 against the dollar,” said Moses Harding, head of the economic and market research at IndusInd Bank.

Harding said the medium-term concerns were related to political risks, with the ability to maintain the pace of reforms, inability to drive growth momentum and limit fiscal deficit.

“Rupee value into Rs 49-51 per dollar may not be to the liking of Indian exporters as excessive rupee gains, compared to their peers, may hit their competitiveness,” he said.

Last week, HSBC Global Research revised its year-end outlook on rupee from Rs 57 to Rs 52 per dollar. It expects rupee to go to Rs 49 per dollar levels by end-2013.

The rupee appreciation is aided by an increase in capital inflows as well as weakening of the dollar on account of positive developments both on the domestic as well as global front. The dollar index, as measured against six major currencies of the world, has fallen to 79.75 levels from 84 levels since June 2012.