Rupee rise seen as temporary

The rupee’s appreciation is seen as temporary by the Street, believing the central bank will keep mopping dollar flows from the domestic market to boost its reserves.

On Friday, the rupee rose a second day, up 20p to log a month's closing high of 61.87 against the dollar. It had opened at 62.10 and during intra-day trade, touched a high of 61.78 and a low of 62.20.

“There was intervention by the central bank through state-run banks. But there was also dollar selling by foreign banks and companies,” said Sandeep Gonsalves, consultant and dealer, Mecklai & Mecklai. He felt it would trade in a range of 61.75 to 62.50 next week, with a weakening bias as intervention by the Reserve Bank of India (RBI) might continue. Month-end dollar demand from importers will also begin.

RBI's foreign exchange reserves rose $236.4 million for the week ending January 9 to $319.48 billion. Foreign currency assets rose by $308.5 mn to $294.85 bn. Gold reserves were unchanged at $19.38 bn. Special Drawing Rights fell $56.7 mn to $4.13 bn. The reserve position with the International Monetary Fund was down $15.4 mn to $1.12 bn.

Narrowing of the trade deficit is also helping the rupee to rise. It was $9.4 bn in December, lowest in the current financial year, from $16.9 bn in November and $10.2 bn in December 2013.. It was the first time in the current financial year that the trade deficit came down to a single digit figure.

“As the rupee is now less cyclically vulnerable, it should be better insulated from bouts of dollar strength. The recent slide in global oil prices is undoubtedly a windfall for India, among the regional economies benefiting most from lower oil. The rupee’s relative resilience to the general dollar strength over the past six months or so underpins this,” said Mole Hau of BNP Paribas, in a note to clients on Friday.