Rupee's strength may not be sustainable, say dealers

The Indian rupee has rallied considerably in the last few sessions, strengthening from 68.71 a dollar to close at 67.09 a dollar on Friday, and it could strengthen some more. But currency dealers say the strength could be short-lived and may not last beyond a few months.

The rise in the rupee was on the back of a rally in the local stock market, which again largely followed global cues, with some help from the Union Budget on February 29 as the government managed to keep its deficits within the target of 3.5% for fiscal 2016-17 and rate cut hopes from the RBI soared.

The rate cut has not happened yet, but the bond yields are falling slowly on lower rate hopes.

A senior currency dealer with a foreign bank said RBI had started buying dollars sporadically through nationalised banks, indicating that the central bank sees these as good levels to accumulate.

According to Abhishek Goenka, head of IFA Global, the current level is good for buying dollars and the firm has started doing so for its clients. Rupee can strengthen back to 66.80 a dollar, but waiting for that won't be advisable, he said.

In the overseas non-deliverable forwards markets also, investors are expecting rupee to remain stable at around the present level for a few months more. For three months, the rate quoted in the NDF market is at around Rs 67.98 a dollar.

"This is a trend reversal in the short term and rupee is unlikely to weaken in the next one month. But there would be some pressure on the exchange rate as oil marketing companies will start paying their bills at these rates and RBI will also build up its reserves," Goenka said.

But rupee will eventually weaken, if not in a month, currency dealers said.

"Rupee will weaken to 70 a dollar level this year, but when that will happen is difficult to fathom," said Samir Lodha, managing director of Quantart Markets Solution, a treasury consultant

India's foreign exchange reserve fell by a sharp $3.57 billion to $346.78 billion in the week ended 26 February. A week before that, reserves had fallen $1.47 billion. While the reserves fluctuate every week, the magnitude of it is rarely over $2-2.5 billion. The last reserves had fallen so much was in the week ended 22 May, 2014, when the reserves had fallen $3.8 billion. On 1 May, 2015, reserves had risen $7.2 billion.

In the year so far, rupee's performance is not good compared with its Asian peers. Even after the recent strengthening, rupee has lost 1.403 per cent, compared with five per cent rise in Indonesian rupiyah and 5.7 per cent rise in Japanese yen. However, Korean won has fallen 2.351 per cent in the same period.