The rupee’s recent appreciation was due to the US Federal Reserve’s decision to keep interest rates unchanged in a meeting held last week. The market is factoring in a 25 basis points cut by the Reserve Bank of India (RBI) in its policy review to be announced next week, due to which the rupee could strengthen further.
However, experts believe the appreciation will be temporary. “I do not think RBI will be comfortable seeing the rupee beyond 65.5. The rupee will gradually start converging with the weakness of other emerging market (EM) currencies,” said Anindya Banerjee, currency analyst, Kotak Securities.
At the end of the two-day meeting of the Federal Open Market Committee of the US central bank, earlier this month, a rise in interest rates was delayed due to factors like low inflation, an uncertain global outlook for growth and financial market turmoil. Rates there have stayed near zero since late 2008. Some experts feel the delay in raising rates there has continued to bother the markets here. It is anticipated that once the US Fed starts raising rates, there will be outflows from EMs, including India.
“The rupee continues to stay under pressure from the bullish undertone of the dollar against major and emerging markets’ currencies, with a risk of sudden shift of foreign institutional investor (FII) flows, from net inflows to outflows, given the downside risks on both equity and bond markets in the short term for the rest of 2015 and the current financial year,” said J Moses Harding, group chief executive, liability and treasury management, Srei Infrastructure Finance.
He feels the the correction from 66.60-66.85 to 65.50-65.65 is in order, adjusting for the excessive rupee weakness from 63.35 in quick time. “The short- term outlook from a combination of domestic and external cues favour the dollar/rupee near-term consolidation at 65/65.50-67, with a bias into the higher end on good importer demand against the risk of temporary exit by FIIs,” he said.