If we get strong US payroll data and there is a resultant sell-off in emerging markets, given the market enthusiasm around the state election results, the rupee would probably outperform its global EM peers, said Brijen Puri, head of trading, JP Morgan Chase.
On Wednesday, exit polls conducted by various agencies after four crucial state elections indicated the BJP was gaining steam ahead of next year's general election. A number of prominent brokerages, including Goldman Sachs, CLSA and Nomura, have in recent weeks opined that a BJP victory would be seen as positive by foreign institutional investors (FIIs) and would draw in portfolio flows.
On Thursday, the currency hit a five-week high in intraday trade before closing at 61.77/$ compared to Wednesday's close of 62.05/$.
The rupee had hit an all-time low of 68.85/$ in August and was the worst performing currency in Asia at that time. Since then, a number of measures announced by the RBI to draw in dollars via foreign currency deposits and bank borrowings have helped reverse sentiment. A change in expectations from the US Fed has also been key in stemming the fall in the currency.
So far this quarter, the rupee has gained 1.1% , while most other Asian currencies have either weakened or gained marginally. For instance, the Indonesian rupiah has fallen by 5.1%, the Thai baht has weakened by 3.3% while the Malaysian ringgit has gained by 0.2%.
Over the next quarter too, most market participants expect the rupee to be strong and analysts' forecasts are now in the 60-63/$ band for the rest of financial year 2013-14.
YES Bank and Crisil expect the rupee to appreciate to 60/$ by March while HSBC forecasts a more modest rise to 62.50/$. I don't see the kind of volatility we saw earlier this year returning for the rupee, said DK Joshi, chief economist at CRISIL.
Samiran Chakraborty, chief economist at Standard Chartered Bank, believes the currency would gain to 61.50/$ by March if domestic political developments are conducive and the US Fed begins its tapering only after March.
While the sentiment for the rupee had turned around in September due to the the RBI's move to supply dollars directly to oil marketing companies, the subsequent positive current account deficit (CAD) data has helped sustain the momentum, dealers said.
India's CAD narrowed sha-rply to $5.2 billion or 1.2% of GDP in July-September from a record 5% of GDP a year ago. The country's GDP growth too came in better than expected at 4.8% for the quarter.
Economists, however, warned that despite the positive sentiment, the currency could see volatility going ahead owing to the domestic political developments.
Between now and the national elections, intermittent political developments can impact the currency, said Samiran Chakraborty, chief economist at Standard Chartered Bank.
The uncertainty over the timing of Fed tapering and domestic elections has meant the pace of FII flows into Indians markets have varied from month to month.
In October, FIIs invested $2.9 billion in equities and this fell to $1.2 billion in November. So far in 2013-14, FIIs have invested $9 billion in equities but have pulled out $11 billion from debt.