Mumbai: The rupee is catching up with other Asian currencies and may strengthen further against the dollar in the immediate future.

The local currency, which was at 48.11 a dollar on 29 September, closed at 46.34 on Thursday, up 3.7% in just six trading sessions. During the same period, the Korean won, which the rupee mirrors, appreciated 1.74%. The euro and the Japanese yen have also strengthened considerably.

Gaining momentum: The rupee had been underperforming other Asian currencies as the economy was under stress, following a widening trade deficit, the possibility of a drought and fears of a slower economic recovery. Ramesh Pathania / Mint

Reserve Bank of India (RBI) governor D. Subbarao’s recent statement that the central bank may have to tighten the accommodative monetary policy has contributed to the rise of the rupee. A rate hike makes the underlying assets of a country attractive to foreign investors.

India is seeing a surge in dollar inflows. In the last one month, foreign investors bought a net in $4.56 billion (Rs21,113 crore) in Indian equities. Since January, they have pumped in $12.8 billion in the Indian market, more than what they withdrew in 2008.

The rupee was underperforming other Asian currencies as the economy was under stress, following a widening trade deficit, the possibility of a drought and fears of a slower economic recovery.

However, India’s trade deficit has improved and the balance of payments turned positive in the last quarter. The late revival of the monsoon also partially dispelled drought concerns.

Prabal Banerjee, group chief financial officer (CFO) at banking, transport, media and oil conglomerate Hinduja Group, said the increase in initial public offerings (IPOs) have given foreign institutional investors (FIIs) an opportunity to invest in India’s stock markets.

As much as Rs12,441 crore worth of fresh shares have been sold by companies between July and September compared with Rs1,659 crore in the same period last year.

“I expect the rupee to continue to gain to 45 a dollar by December and if this pace continues it may touch 44 a dollar by March. RBI may intervene in the forex market to save exporters some pain," Banerjee said.

The sudden strength in the rupee has prompted exporters, who were holding on to their dollar reserves, to come into the market and sell dollars on fears of a further rise in the local currency.

It’s bad news for export-oriented sectors such as software developers who bill their overseas clients in dollars. As the rupee strengthens, they get less money after conversion for their bills. A stronger currency also hampers export competitiveness of the nation but RBI may not be worried too much about that, say foreign exchange dealers.

Inflation turned positive in the first week of September and could cross even 5% by March, according to economists. In this scenario, RBI would like to battle inflation rather than checking the appreciation of the rupee, which is in any case moving in tandem with the global currency, said Kiran Mummaneni, Yes Bank Ltd’s associate director of foreign exchange. A strong rupee brings down the cost of import and helps the central bank tackle inflation.

“At some point RBI will start absorbing dollars to slow down the pace of appreciation. It may not want to do that yet as the rupee is just following the movement of other Asian currencies," said Mummaneni.

Yes Bank expects the rupee to be at 45 a dollar by December while Standard Chartered Bank expects the local currency to trade at 45.50 a dollar during that period and gradually rise to 45 a dollar by March. N.S. Paramsivam, senior vice-president at steel, oil and shipping conglomerate Essar Group, expects the rupee to end the calendar year at 45.60 a dollar.

Axis Bank Ltd’s head of treasury R.V.S. Sridhar, too, said the rupee may not go beyond 46 a dollar in the immediate future but by December it could be at 45.50.

Deepak Mundra, senior vice-president, finance, at agriculture equipment company Jain Irrigation Systems Ltd said the rupee will continue to strengthen, only halted by RBI’s interventions. He expects the rupee at 46.50 a dollar by December before strengthening further.

HDFC Bank Ltd also expects the strengthening bias of the rupee to continue. “International fund managers tend to seek returns to shore up their profits during the last quarter of the calendar year and this yield-seeking could result in another flood of dollars into the Indian equity markets before the year-end if the equity markets correct a little and Q2 company results turn out to be healthy," HDFC Bank chief economist Abheek Barua wrote in a research report.