The Rupee on Friday closed at a one-month high of 63.78 to the dollar even as the greenback fell significantly against most of its peer currencies following the European Central Bank’s meeting and dovish comments from the US Fed. The currency closed at the highest level seen during the day. MS Gopikrishnan, head of FXRC trading, South Asia at Standard Chaterered Bank confirms that Friday’s appreciation of the Rupee is mainly because of the dollar weakness against most currencies. “Euro rallied post the ECB meeting last (Thursday) evening as Draghi mentioned they were ‘monitoring’ the Euro volatility which fell short of general expectation that they will be worried about the recent Euro strength. Dovish comments from one of the FED Governor’s triggered another round of dollar sell-off,” Gopikrishnan pointed out.
Friday’s appreciation of the Rupee was the highest one-day rise seen in almost five weeks. On a year-to-date (YTD) basis, the currency has given a return of 6.48%. Take for example, the Indonesian Rupiah which has given a YTD return of 2.184% or the Chinese Renminbi which gave a return of 7.48%. The Malaysian Ringgit logged a return of 6.92%, the Brazilian Real 5% and the Russian Ruble gave return of 7.77%.
The fact that in a week’s time, the YTD returns of some of these currencies have gone higher than the Rupee might be an indication that the Rupee did not appreciate as much as the other currencies did.
The Reserve Bank of India (RBI) has been actively shoring up its dollar reserves which hit a record high of $398.122 billion as on September 1—a massive $3.57 billion rise from the week before.
Bank of America Merrill Lynch pointed out in a recent report that it continues to expect the RBI to recoup forex reserves at every opportunity. “We estimate that it has bought about $16 billion in the spot market since April and $6 billion in the forward market in 1Q17. After all, FPI and import cover are well below pre-2007 levels. Second, capital inflows should moderate on rich equity valuations and FPI G-sec limits closing,” the report stated.
The dollar index, which indicates the general strength of the dollar against other currencies, was trading at a 2.5 year low of 91.14. Some of the weakness in the dollar could also be attributed to the possible negative impact of Hurricane Irma. Fund flows have also been significant at least on the debt side. Foreign portfolio investors (FPIs) have so far poured a record $20.27 billion into Indian debt.
In the last three sessions itself, FPIs have poured over $400 million into the debt segment. However, foreign investors have been pulling funds from equities with more than half a billion dollars flowing out over the last five sessions. “While the current trend indicates that Rupee could appreciate, I think the vulnerabilities of the currency has increased in last few months. In our estimates, the unhedged exposure has increased by around $50 billion since the beginning of 2017.
Any reversal in dollar movement could lead to a steep fall in the Rupee as importers/investors jump into hedging,” Gopikrishnan asserted.