With major foreign institutional investors pumping funds heavily into the Indian economy, the rupee is poised for a further appreciation against the dollar. On Monday, the rupee touched an intra day high of 44.94 (18 month high )against the dollar. It closed at 44.97 as against 45.23/4 on Friday. Overseas investors have bought a total of $3.4 billion of local equities this year after purchasing a record $17.6 billion last year. ?The equity markets are holding on to their recent gains. With the India-growth-story intact, bond yields are attractive and provide for fair amount of advantage (covered arbitrage) to the overseas investor. Also, the dollar gains against majors have been offset by broad strength of Asian currencies and Asian bonds, thereby contributing to the recent rupee gains,? said RKGurumurthy, head of trading, financial markets at ING Vysya Bank.
Gurumurthy added that there is still some room for the rupee gains and it could ideally test 44.80 soon. ?We expect in the medium term, the rupee target remains at 44.25. Having said that, any move above 45.30 now will annul the prospects of a move past 44.80 though,? he added.
While FIIs are heavily investing into the Indian economy, which is leading to an appreciation in the rupee, the Indian currency is also gaining owing to dollar?s movement against other currencies.
According to a report by Mecklai Financial, the rupee has strengthened to its highest level in more than 18 months on general regional optimism. ?The dollar has managed an impressive advances in the week, pushing to a 10-month high against the euro, while the sterling was undermined on reduced fears over the near-term inflation outlook. The euro is hurt by persistent uncertainty over a Greek support package,? the report said.
Gurumurthy noted the euro has been hostage to the Greek debt saga and appears to have gotten a reprieve with some amount of EMU-IMF support in the pipeline.
?We feel that technically too, the single currency is likely to reverse its large decline as a correction is overdue. The same goes for the dollar as well. Its recent gains against the major currencies may undergo some correction before resumption of further gains,? he said.
Typically, importers, especially the oil companies, stand to gain on the back of rupee?s strength as it helps firms that extensively import. However, much would also depend on how dynamic the companies are able to hedge in relation to their total exposure. In such a scenario, with an appreciation in the rupee, exporters especially the IT companies might feel the heat as sharp gains in the rupee could dent pricing power and thereby impact their topline.
Margins of technology firms have been hurt as typically, every 1% rise in the rupee impacts their margins by about 50 basis points. The country?s second largest software exporter, Infosys currently has just over $600 million worth of hedges and its revenues in the December 2009 quarter were at Rs 5,741 crore. S Balakrishnan, CFO,
Infosys had said business could be hit if the appreciation in the rupee is sharp and in case it strengthened more than 5% in a quarter. Some firms like Sun Pharma, whose export is expected to cross Rs 450 crore in 2010-11, have historically hedged an amount equivalent to six months? net exports. The spokesperson of the company said the same strategy would be followed going forward.
