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Will the rupee rally continue?

FIIs return to emerging markets as fears of Fed tapering ease and India's data improve, but CAD a challenge

Malini Bhupta
Last Updated : Sep 12 2013 | 12:38 AM IST
The rupee no longer seems to be the ugly duckling among emerging market currencies it would seem. After ending 2.1 per cent higher at 63.84 on Tuesday, it rose another 0.74 per cent on Wednesday to 63.37 against the dollar. Currency strategists believe the rupee will now remain capped at 65.10 against the dollar, as positive data from India and relatively weaker jobs data from the US will prevent any overshooting of the currency. This is in sharp contrast to the commentary emanating from currency strategists sitting in Hong Kong and Singapore. So, what has changed fundamentally for the rupee?

For one, the overtly bearish sentiment, which dragged the rupee down in August, has subsided, as consensus is building around the notion that the US Federal Reserve will not start tapering its stimulus programme in earnest from September. In just a week, the currency market has gone from ultra-long on the dollar to bullish on the rupee, claim experts.

No doubt, Raghuram Rajan's maiden speech as Reserve Bank governor set the record straight, but the rupee's fortunes have changed for the better, with fickle foreign institutional investors rediscovering emerging markets like India again. The not-so-promising data from the US has also helped. The rupee's uptick has also drawn support from the dollar, which has continued to trade flat, with the dollar index (index against six major currencies) closing at 81.82 on Tuesday. A combination of domestic and international factors has driven the rupee up.

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On Tuesday, foreign institutional investors (FIIs) bought equities worth Rs 2,564 crore. Since September 4, FIIs have pumped in Rs 5,051 crore into equities. Kotak Securities believes this is because the taper-fear script appeared fatigued, as it had run way too long without a meaningful break. What has also helped is positive data from China, following the measures taken to pump up growth. However, the risk surrounding the funding of the current account deficit (CAD) is unlikely to be mitigated through such buying.

Though exports have been showing signs of recovering over the last few months, the rupee continued to fall in August, as the market did not believe the country would be able to fund its CAD. The trade deficit for August narrowing to $10.9 billion from 12.26 billion in July has also helped the rupee. Morgan Stanley expects the deficit to narrow to $12-13 billion for the quarter ended September 2013 (2.7 per cent of the GDP annualised) versus an estimated $21 billion in the June quarter (4.7 per cent of GDP annualised). Economists say the CAD coming close to 2.5 per cent of the GDP range is a good sign. For any sustained improvement inflation has to come down to make gold unattractive and oil prices have to stay benign.

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First Published: Sep 11 2013 | 9:36 PM IST

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