Rupee climb linked to fund inflows, RBI intervention

The rupee is expected to keep a firm grip on the upward trajectory, backed by support from the Reserve Bank of India (RBI) and improving risk appetite globally. However, risks of fresh concerns from the euro zone may play spoilsport, analysts said.

In January, the rupee has appreciated seven per cent, after being the worst performing Asian currency in 2011. On Friday, it closed at 49.32 per dollar, registering a gain for the fourth week. “The recovery has surprised everyone in the market,” said Param Sarma, director and CEO, NSP Treasury Risk Management Services.

The gain can be attributed to the recent diversion of foreign funds towards Indian debt and equity investments. According to data from the Securities and Exchange Board of India, of a total net investment of about Rs 27,000 crore, there were foreign fund inflows of about Rs 17,000 crore in domestic debt since the start of this month.

CENTRAL BANK’S ACTION

* Active forex intervention in both spot and forward markets

* Higher interest rates on deposits for non-resident Indians

* Relaxing external commercial borrowings norms

* Prohibition of cancelling and rebooking of forward contracts

* Cut in interbank net open positions

* Past performance facility on currency hedging for importers cut from 75% to 25%

* Banks asked to report hedging status on loans over $25 million

* Governor says above measures may stay

* Banks to be asked to work out board-approved hedging policy for borrowers

Before the rupee backtracked its fall, it had depreciated by 20 per cent through August-December 2011. Taking note of high volatility in the foreign exchange market, RBI began selling dollars in September. Data showed it intervened in the forward market, too, in November. The currency had touched a record low of 54.3 on December 15.

Besides intervention, RBI also took a number of steps last month to stimulate capital inflows and curb speculation. “The administrative measures that we took before Christmas — do not be under the impression that they are temporary measures,” said governor D Subbarao at his press conference after the third-quarter monetary review.

Subbarao also said banks will be asked to put in place a board- approved hedging policy for their borrowers. This will ensure they cover the unhedged part of their foreign exposure in the absence of a natural hedge.

“While RBI’s measures will make sure the rupee does not depreciate further, foreign fund flows would be essential for rupee appreciation,” said A Prasanna, economist at ICICI Securities Primary Dealership. He expects the rupee to stabilise around 49 in the medium term.

However, renewed concerns from the debt-ridden euro zone may lead to another round of depreciation in the current quarter, though there may not be any sharp downward movement. “The dollar-rupee pair could move back higher towards the 50.50-51.00 mark but sharp depreciation is unlikely, due to the prospect of sustained RBI intervention,” said Abheek Barua, chief economist, HDFC Bank. He expects the currency pair to move towards the 47.50-48.50 range by the end of next financial year. Ratings agency Crisil said in a report that the rupee may rise to 48 per dollar by March 2012.