Mumbai: Bankers are saying the worst is over for India’s currency. The rupee, which hit a record low of 68.85 a dollar on 28 August, has staged a dramatic recovery and since risen 5.5% to 65.25 on 6 September.
The Reserve Bank of India (RBI) on 28 August allowed oil marketing companies to buy dollars from the central bank through a swap window and followed this up on 4 September with allowing banks to swap their dollar deposits with it at a special concessional rate of 3.5% for at least three years and permitting local banks to raise 100% of their core capital from overseas all on 4 September. Such borrowing can also be swapped with RBI at 1% less than the market rates.
These measures and the passage of a few crucial bills in Parliament have restored investor confidence in the currency.
The rupee won’t go anywhere close to Rs68 per dollar in the next three to six months as dollar inflows from last week’s RBI moves and a likely shrinking trade deficit will support the currency, according to Agam Gupta, managing director, fixed income trading India, at Standard Chartered Bank Plc.
“I expect at least $15 billion to come from RBI’s recent moves on foreign currency deposits and allowing banks to raise higher amount of capital from abroad. Trade deficit is also likely to shrink and the government may announce more measures to curb gold and oil imports,” Gupta said, adding that all these measures mean that “the worse is over for the rupee.”
The trade deficit is the difference of a country’s exports and imports.
Gupta expects India’s deficit to ease to $10 billion in August from $12.27 billion in July as the value of exports rise and imports remain stable.
The rupee’s “secular downward move” is over, said Ashish Vaidya, head fixed income, currency and commodity trading, India, at UBS AG.
“We saw a phase in which the rupee fell sharply and more than other emerging market currencies. That phase is now over,” Vaidya said. “Yes, there are risks like a tapering by the US Federal Reserve and higher oil prices because of a possible US strike on Syria, but more or else the crisis is behind us.”
Higher oil prices are likely to worsen India’s current account deficit, which has ballooned to a record $88.2 billion or 4.8% of gross domestic product (GDP) in fiscal year 2012-13. Oil constitutes 80% of India’s imports.
Vaidya expects the rupee to be around 65 per dollar with a broader 62-65 per dollar range in the next three to six months.
To be sure, bankers do not expect the rupee to rise sharply from current levels. However, the sharp fall seen in the past four months is unlikely to be repeated. From 53.80 a dollar on 30 April, the rupee slumped 21.84% to 68.85 on 28 August.
The sentiment towards the Indian currency has turned for the better, said Manoj Rane, managing director and head of fixed income and treasury at BNP Paribas SA’s Indian unit.
“From here on, if the currency has to appreciate, we will have to see real capital inflows coming in,” Rane said. “I would think the RBI should target to keep the rupee value at Rs 65 per dollar because in times of global uncertainties it is better than the currency is a bit undervalued.”
A proposal from the BRICS (Brasil, Russia, India, China and South Africa) nations countries to launch a $100 billion currency reserve fund also arguers well for the rupee, according to Jayesh Mehta, managing director and country treasurer at the global markets group at Bank of America-Merrill Lynch.
On Thursday, the BRICS group announced the launch of a $100 billion currency reserve fund to tide over the likely end of the US Federal Reserve’s stimulus package. India will contribute $18 billion to the fund.
“It will create a buffer for the US tapering,” Mehta said, adding that he also expects $15 billion to $20 billion to come through bank deposits and fund raising from banks.
Besides the moves by RBI, two important developments in Parliament—the passage of the pension reform legislation that allows foreign direct investment of up to 26% in the sector and gives statutory power to the sector regulator and the land acquisition Bill—has also brightened investor sentiment.