Rupee hits 8-month high

But gains capped as RBI buys dollars

The rupee continued to gain against the dollar, touching an eight-month high on Wednesday, owing to strong foreign fund flows. However, the gains were capped, as the Reserve Bank of India (RBI) was said to have bought dollars to boost foreign exchange reserves.

The rupee closed at 60.17/dollar, compared with its previous close of 60.48. It had recorded its previous high, 59.42/dollar, on July 29.

“Nationalised banks bought dollars from the market. They were seen buying the whole day,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.

Currency dealers at state-run banks say to boost the central bank’s foreign exchange reserves, they have been buying dollars on behalf of RBI for some time. “As dollar-buying might continue, the rupee appreciating and breaching the 60/dollar mark is a bit difficult. But the way India is attracting foreign flows in domestic markets, further appreciation in the rupee cannot be ruled out,” said a currency dealer at a state-run bank.

Foreign funds are betting on a Bharatiya Janata Party-led National Democratic Alliance government at the Centre, after the general elections. Exchange data show this month, global funds have pumped in $3.6 billion into Indian stocks and debt.

“Right now, there’s euphoria and the rally is being driven by sentiment,” said Paresh Nayar, head of currency and money markets at FirstRand Ltd. “The central bank will closely monitor the situation because if there’s any unfavourable election outcome, it will have to roll out the ammunition to stabilise the markets.”

In a note to clients, ICICI Bank said, “We expect the rupee to trade in a range of 60-62 during FY15. Compression in the current account deficit and accretion to foreign exchange reserves, amid policy-induced capital inflows, helped reduce the external sector vulnerability. The key risk to the outlook is the outcome of the general elections in May 2014 and a shift in the US Fed’s monetary policy stance — from gradual to aggressive tapering.”

Latest data show RBI’s foreign exchange reserves have risen to a 27-month high, a level the Street feels is comfortable to tackle the US Fed’s tapering of its bond-buying programme.

In the week ended March 14, foreign exchange reserves rose $1.84 billion to $297.29 billion, showed RBI data released on Friday. In the same period, foreign currency assets, a key component of foreign exchange reserves, rose $1.84 billion to $269.81 billion, while gold reserves remained unchanged.

On September 6, 2013, forex reserves had hit a 39-month low of $274 billion. The situation improved after  several steps taken by the central bank to encourage inflows.