Aided by sustained foreign fund inflows, the Indian rupee on Monday surged by 57 paise to close at an over seven-month high of 68.53 against the US dollar, marking the currency’s sixth straight session of gains.
The rupee has appreciated by 161 paise in the last six trading sessions due to strong capital inflows. Foreign portfolio investors (FPIs) have pumped over Rs 21,000 crore in March so far. In February, FPIs brought in Rs 17,220 crore, taking the total inflows since February 1 to over Rs 38,000 crore.
According to analysts, narrowing trade deficit, weakness in the dollar against major global currencies and the bullish stock markets aided the forex market. The dollar index, which gauges the greenback’s strength against a basket of six currencies, fell 0.20 per cent to 96.40. “The rupee continued advancing for the sixth day in a row, making it the best performer among the Asian currencies in today’s trade amid better than expected trade data and foreign fund flows,” said V K Sharma, head, PCG & Capital Markets Strategy, HDFC Securities.
According to data released by the Commerce Ministry, the marginal 2.44 per cent rise in exports as well as lower imports of gold and petroleum products in February significantly narrowed the country’s trade deficit to $ 9.6 billion. This augurs well on the external front as current account deficit (CAD) is expected to come down significantly in the ongoing quarter. The dollar suffered after soft US data increased bets the US Federal Reserve will cut rates later this year while the pound hovered near the nine-month high on hopes for a delay in Britain’s exit from the European Union. Other Asian units, however, were trading mixed against the dollar. “If the US Fed changes its policy again, the inflow will come down. It all depends on the US interest rates move,” said an analyst.
Strong rupee to benefit importers, mainly oil firms
Huge capital inflows are pushing the rupee to new peaks against the dollar. Reports that the United States Federal Reserve will cut rates later this year are driving foreign investors to emerging markets like India. While a strong rupee will benefit importers, mainly oil companies, exporters will find their earnings depreciating. Though any increase in crude oil prices from the current levels may limit the rupee strength, analysts say it’s time for the RBI to mop up dollars from the market to stem the sharp appreciation of the currency.
In a bid to mop up dollars and pump in rupees, the Reserve Bank of India last week said it would conduct its first dollar/rupee buy-sell swap auction on March 26. The RBI plans to swap rupees for dollars for a total of $5 billion with domestic banks which is likely to help achieve its twin objectives of pushing interest rates down while also preventing a sharp appreciation in the rupee. The benchmark Sensex on Monday rose by 71 points to 38,095.07 amid huge FPI inflows and the strengthening of the rupee. The index had gained over 1,300 points last week as the bull rally took key indices to new peaks. Meanwhile, analysts said the appreciation of the rupee will bring down oil import bill. Imports will become generally cheaper as importers benefit from the dollar weaknesss.
However, exporters, mainly software exporters, will find their earnings coming down. “Such a sharp appreciation is causing concern among the exporters as well as importers as uncertainty in the exchange rate is driving volatility. Exporters who have contracted at 74 to a dollar but could not hedge it, due to non-availability of limit by the banks, tend to incur huge losses. Similarly, those who imported at 74 to a dollar for exports few months back, will now get 68-69 upon exports resulting in setback to them,” said Ganesh Kumar Gupta, president, Federation of Indian Export Organisations.