Mumbai: The rupee could possibly outperform other major Asian currencies because it is expected to strengthen further, encouraged by a stable, pro- reform government and improved economic conditions.
The local currency strengthened as much as 47.26 a dollar on Tuesday but gave up its gain later in the day to close at 47.78 as the Reserve Bank of India (RBI) started buying dollars from the marker to stem a rapid appreciation of the local currency.
According to dealers, RBI has bought at least $1.3 billion (Rs6,175 crore) from the market since Monday. A rising local currency hurts exporters as they get less money for their billings in dollars.
This is why the IT index of the Bombay Stock Exchange fell 10.1% to close at 2,854.47 points on Tuesday, even as its benchmark Sensex index rose 0.12%. Bellwether Infosys Technologies Ltd fell 11.65% and Tata Consultancy Services Ltd fell 8.15%. A large portion of these firms’ income is generated through exports.
The local currency has appreciated 3.47% against the dollar in two days and 4.37% in one month. A week ago, the rupee was the worst performer among the 10 most active Asian currencies.
According to currency dealers, the rupee can gain further and may touch 45-46 a dollar by June. With the Congress party-led United Progressive Alliance government assuming power, both the stock and currency markets are expecting that foreign institutional investors will bring funds to the Indian equity market and this will strengthen the rupee against the dollar.
RBI may go slow in its dollar buying as it will not like to flood the system, already flushed with liquidity, with more money. Banks are parking at least Rs1.25 trillion of their excess cash with the central bank daily since April. For each dollar the central bank buys, it infuses an equivalent amount of rupee in the system.
In the overseas market, the investors are more bullish on the rupee’s strength than their domestic counterparts. Overseas investors are expecting the rupee to be at 47.99 a dollar in three months while the domestic investors see the rupee trading at 48.14 during this period.
“It shows that the rupee is going to strengthen in the domestic market,” said N.S. Paramsivam, treasurer at the diversified Essar Group.
“This correction was long overdue. The rupee was unjustifiably weak due to uncertainties. The levels that we are seeing now are quite natural,” said a dealer with a public sector bank who declined to be named. The rupee will reach 45 a dollar in the next three months, he said.
Sudarshan Bhatt, chief dealer with state-run Corporation Bank, expects the rupee to strengthen to 46.90 a dollar in the coming days.
Yes Bank Ltd’s associate director of foreign exchange, Kiran Mummaneni, expects the rupee to reach 45-46 a dollar by the end of June.
“We have to watch this stock market movement and FII (foreign institutional investors) flows. The rupee could go to 46 a dollar in the medium term if global markets remain conducive and FIIs react positively,” said R.V.S. Sridhar, senior vice-president, treasury, Axis Bank Ltd.