Rupee strengthens on portfolio capital flows, weak dollar

Touches two-week high on fears of a prolonged shutdown of US government

The rupee strengthened to a two-week high on portfolio investment flows and a weak dollar due to fears over prospects of a prolonged shutdown of the US government.

The Indian currency opened at 62.15 a dollar in early trade and showed a streak to gather strength throughout. At close, it ruled at 61.74, up from the previous close of 62.47 according to Bloomberg data.

Treasury executives and foreign exchange dealers said capital flows had been good. Increased dollar selling by exporters and a higher opening in the domestic equity market also supported the rupee.

Foreign funds were net buyers of over $2 billion in Indian equities in September, the first month of positive purchases after May. Foreign investors have returned to risk assets on the Fed’s assurance it would stick to its $85-billion monthly bond purchases.  

The dollar fell against major currencies on the US government’s partial shutdown following failure to approve the budget. This triggered fears the US Fed will further delay tapering its bond-purchase plan, said a dealer with a private bank. On Tuesday, the rupee gained 14 paise against the dollar, owing to a better-than-expected current account deficit (CAD) data.

India’s CAD was $21.8 billion (4.9 per cent of gross domestic product) for the first quarter ended June, due to rise in imports, especially that of gold and shrinking exports. The CAD for April-June 2012-13 was $ 16.9 billion (four per cent of GDP).

The reading for the quarter ended September is expected to be better due to growth in exports in July-August plus drop in import of gold. The overall CAD for FY14 is expected to be around four per cent of GDP. Union Finance Minister P Chidambaram, while on a visit here last Friday, had said the currency’s “right value” was between 59 and 60 a dollar.

After falling 21 per cent between April and August, the rupee reversed the trend in September. This was aided by policy initiatives by the Reserve Bank of India  to attract inflows. The Fed’s decision to postpone tapering of asset purchase programme is also supporting emerging market currencies. In September, the rupee has appreciated five per cent against the dollar.