The Indian rupee has been on a rising spree, and the upward rally would continue in middle-term, feels Anindya Banerjee, currency analyst, Kotak Securities. The Indian rupee gained 13 paise in early trade on Thursday to touch fresh 21-month high of 63.98 against the dollar. It had closed near 21-month high of 64.11, 15 paise up on Wednesday, marking the highest close for the Indian currency since August 2015.
“We turned bullish on rupee post RBI monetary policy and Union Budget. We continue to expect further appreciation over the medium term. However, bouts of depreciation can be seen during phases of downward correction in the stock market. The larger trend remains bullish for rupee as low inflation expectations, high real rates, conservative monetary policy, tight fiscal policy, high political equity make Indian Rupee an attractive long play for traders at home and abroad, ” Banerjee said. He further added that technically, USDINR can aim for 63:50/70 zone, which is a major support area. Resistance remains between 64:20/30 and 64:70/90 levels on spot.
Below are the 5 factors that are driving the rupee up
1) All of the outperformance in INR in 2017 came after January. First it was the Union Budget where government continued on its path of fiscal prudence and other was RBI, shocking markets with a pre-emptive change of policy stance. A tight fiscal policy and conservative monetary policy triggered a sharp rise in demand for INR from offshore carry traders. As a result not only Indian debt market saw huge wave of inflows but NDF and onshore markets, both witnessed strong receiving interest on the INR forwards.
2) State elections in March gave another boost to rupee. An emphatic win of BJP signalled that countrymen are looking to be governed by a strong leader. High political equity makes rupee attractive.
3) RBI doubled down on their hawkishness by hiking reverse repo by 25 bps. With 4-5 lakh crore of excess liquidity sloshing in the banking system, reverse repo has become effective signalling rate in the economy. Therefore, a hike in RR means a proverbial tightening of monetary policy. This added further fuel to the carry play in INR.
4) External situation was benign as risk on mood in global markets kept EM currencies strong against US Dollar. Softening of US 10 year yields, as commodity prices fell from their January peaks made EM debt even more attractive.
5) Huge excess liquidity in the interbank markets has made RBI cautious about its intervention in Rupee market. Emboldening the carry traders.