The rupee is expected to breach the 46 per dollar level very soon this week and hover in a wide range of 45.90-46.20.
There are a couple of factors that are at present contributing to the appreciation of the rupee against the dollar.
While inflows from foreign institutional investors (FIIs) continue to be main driver, the overvaluation of the local currency in real effective exchange rate terms to 100.76 has added to the bullish sentiment.
The rupee stands overvalued on the basis of reserves valuation, current account trade surplus, inflation etc.
And on a cross-currency basis, though the euro and the pound sterling both are losing to the dollar, the rally continues for the local note.
The participants are of the view that the overvaluation is temporary. This outlook has, in fact, forced some exporters to withhold their dollar receivables.
Last week, amid abundant inflows, the rupee closed at a new high of 46.11 per dollar after spiralling up to 46.0650.
While there is no repo rate cut to deflate the sentiment in the money market, it has emerged as one of the major factors for forex inflows.
This is because interest rates in India have been static in contrast to overseas rates including those in south-east Asian countries where they have been slashed by at least a quarter of a point.
Last week kicked off with the rupee at 46.33/34 per dollar but closed at 46.11. Dealers said lack of demand has inflated dollar supplies.
This torrential inflows of greenback has been on for quite some time now, but the lack of demand for it has led to the rupee rising against the American currency. This is at a time when the dollar has been gaining against the euro and the pound sterling.
Premiums
Forward premiums are expected to soften a bit due to a clutch of reasons. Primarily, except for the forward dollar demand from the Reserve Bank of India (RBI) both for the purpose of intervention as well as in preparation for the Resurgent India Bonds redemption, there is hardly any demand for the global currency in the forward market.
Both banks as well as importers prefer to keep open positions and borrow dollar in the cash market for meeting the requirement.
In fact, towards the middle of last week, there was dollar shortage in the cash foreign exchange market with cash spot rates falling to around 1.5 per cent, which usually tracks the inter-bank overnight call money rates.
Apart from the foreign institutional investor inflows that have reduced the demand for dollars and the pressure on the rupee premiums, the review of GDP data on the back of good monsoon has also given an indication that government borrowings will be less. This means pressure on interest rates as on rupee premiums will be less too.
Last week, forwards softened tracking the spot rupee and facing absolute lack of dollar demand.
However, sale of buy swaps by the RBI maintained the pressure on the premium.
These swaps helped the RBI to keep dollars in good supply in the cash dollar market and buy the supplies in the forward market.
