The rupee rose to its highest in more than a year today on expectations of more capital inflows and as the dollar weakened against a range of currencies
The rupee has gained 3.1 per cent in the past four sessions on expectations that India's high-yielding currency and improving global risk appetite will attract more foreign flows. The currency closed at 46.34 today.
The rupee has risen 3.8 per cent so far in October, driven by net foreign buying of nearly $4 billion of stocks since mid-September.
Besides the strong inflow of portfolio investments, dealers said the “sideline” role played by the Reserve Bank of India also worked on the market sentiment.
Elaborating on the RBI preference to stay away from the market, a head of treasury with a foreign bank said, “The dollar is collapsing against major international currencies. It is odd for any central bank to defend the home currency to protect a particular section (read exporters’ lobby).”
The trade deficit is down — imports have crashed — and the deceleration in exports has slowed. At this point when inflation is on the rise, a strong rupee is good for a country because it makes imports cheap, he pointed out.
In the past also, RBI has chosen not to intervene when currencies across-the-board are moving against the US dollar. Plus, it has been careful not to give the impression that it is defending a particular level. That, too, possibly prompted it to hold back, according to an HDFC Bank report.
Yesterday, RBI deputy governor K C Chakraborty indicated that the central bank was not overly concerned with day-to-day changes in the value of rupee.
“On a long-term basis, we are happy with the way it is moving. RBI tries to check long-term volatility but it all depends on market players. Compared to the way Yen and Euro are moving, the rupee is much more stable,” he said.
Other Asian emerging market currencies like the Korean won, for instance, have also seen significant gains over the last few trading sessions.
HDFC Bank said the currency gained sharply on days that did not see spectacular gains in the stock market. This suggests that capital flows other than portfolio flows into the equity markets have picked up and these have impacted the rupee.
Thus, the rupee is no longer likely to be a simple play on equity market performance. ECB flows, FDI, trade credit and other debt flows will also play a critical role in determining the currency’s direction and momentum.
Debt inflows in particular could pick up given the emergence of the differential monetary policy stance adopted by central banks in the developing world versus the advanced countries.
While the rupee surged, government bonds fell for the second consecutive day on worries of a near-term tightening in the monetary policy. The 6.90% 2019 bond ended at INR97.56, down from INR97.62 Tuesday’s close. Yield on the benchmark note rose one basis point to 7.25%. “The sentiment is weak, but the market is holding on to hopes that RBI will increase the HTM (held-to-maturity) investment cap and the SLR (statutory liquidity ratio) to support market appetite,” a dealer with a state-run bank told agencies.
Meanwhile, the dollar/rupee futures declined trailing the dollar’s movement in the global and spot markets, dealers said. The one-month contract on National Stock Exchange ended at 46.36 per dollar compared with 46.74 yesterday.
