The rupee’s appreciation against the U.S. dollar since the presentation of the Union Budget on February 1 and the victory of the BJP in the U.P. elections has startled Indian exporters, who had until then been in a largely comfortable zone as the currency’s movements remained in a more predictable range.
Currency analysts — a majority of whom were in February predicting that the rupee would trade in a 70-72 to a dollar range by the end of 2017 — now predict the local unit will trade between 66-64 by March 2018, with some even more aggressive calls placing it at 62.
While the rupee has appreciated more than 6% so far in 2017, the U.S. dollar index has declined 8.9% this year.
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“This time rupee’s appreciation is on the back of strong fundamentals like low inflation, strong capital flows, economic reforms and weaker dollar in the global space,” said K.N. Dey, Managing Partner, United Financial Consultants, a forex advisory firm.
Whether this appreciating trend in the local currency is going to sustain will depend on a lot of factors.
One thing is sure, said Mr. Dey, “Rupee is not going to have one-way rally going forward, lot of factors will be at play and intermittent corrections could be seen. However, the long term story is still in favour of the local currency”.
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With domestic equities holding steady near record highs, the rupee story has turned quite rosy in the current environment. The strong inflows in equity and debt markets suggest a positive narrative for the currency, amid a strong economic framework and steady inflation outlook.
“The slide in dollar index towards 15-month lows, amid political uncertainty in the U.S., has been a catalyst for the rupee’s strength and till something changes dramatically on the global or domestic front, sub-65 prices are here to stay,” said Sugandha Sachdeva, VP - metals, energy & currency research, Religare Securities Ltd.
While the rupee has lost some ground recently amid global geopolitical uncertainty triggered by heightened tensions between North Korea and the U.S., the longer-term outlook remains upbeat. Prospects of a third rate increase by the U.S. Fed and the outlook for the dollar index are largely hooked on to the inflation trajectory, which is still subdued at the moment.
With eyes on the progress of the monsoon on the domestic front and inflation releases and the monetary policy stance of the Fed in the U.S., volatility is expected to stay heightened for now.
“Still”, said Ms. Sachdeva, “the local unit looks poised to surpass the recent highs close to 63.57 mark and appreciate towards levels of around 62.70 in coming days.”
“Inflation differential compared to other trading partners have narrowed down,” said Tushar Arora, Senior Economist, HDFC Bank. “While it might be early to say that the RBI’s intervention strategy has changed, they seem open for marginal appreciation,” he added.