With the dollar weakening against other currencies and capital flows into India remaining strong, the rupee on Monday touched a three-week intra-day high against the greenback of Rs 44.89, closing at 44.95 as against Friday?s close of Rs 45.11. With this, the Indian currency has gained more than 2% in the last five sessions and could appreciate further, say experts.
Bond yields rose to a 26-month high as money markets remained as tight as ever. The yield on the 10-year benchmark bond rose to 8.2%, while three-month certificates of deposit (CD) commanded yields of 8.8%, a new one-year high and the rate on the three-month commercial paper remained at a 12-month high of 9.25%. Banks borrowed a substantial amount of Rs 1,15, 200 crore from RBI’s repo windows.
Says Ananth Narayan, MD & head (rates), South Asia, Standard Chartered Bank: ?The dollar has been weakening against other currencies, helping the rupee gain. But given interest rate differentials and good economic data, capital flows are expected to remain strong and dominate in the short term.? Narayan expects the rupee to trade at 44-levels by March next year.
Jayesh Mehta, country treasurer, Bank of America-Merrill Lynch too believes there?s a chance of the rupee hitting 44 early next year, though he says it?s likely the currency will trade in a range of 44-46. ?Going by experience, there are times when there are outflows of capital and moreover, we have seen intervention by the central bank,? Mehta observes.
Adds Hitendra Dave, head, global markets, HSBC: ?We expect the rupee to be range-bound with a 2% move on either side from the current levels. As long as capital inflows are buoyant, the rupee will appreciate and the current account deficit will continue to be funded.?
Apart from flows into equity markets, the rupee could also remain strong because of debt inflows. Limits to buy Rs 22,000 crore worth of government bonds and Rs 28,600 crore worth of corporate bonds, auctioned last week, were almost entirely taken up by FIIs. While the utilisation of the cumulative limit of $10 billion over the next 90 days would depend on global risk aversion, it?s unlikely investors will change their minds about India. The country has already seen record inflows of $10 billion into the debt market this year. With widening interest rates between India and overseas markets, FIIs are expected to use up their quotas and additional demand should alleviate the pressure on banks, especially in times of a liquidity shortage.
If experts expect the rupee to be volatile, its because oil prices are nudging $90 a barrel and the current account deficit remains high. Much like in 2010, the dollar could be volatile next year too.
In early 2010, rupee was trading at Rs 46.32 and, by mid-April, had strengthened to Rs 44.40. Just when the market believed it would touch 43-43.50, it started weakening. By mid-May, the rupee was back to Rs 47.70. It then recovered to Rs 46.17, having lost nearly 4.3% in a single month in May. However, it later began to weaken following the uncertain outlook for developed countries and turned only after mid-September. After the Coal India issue, the rupee regained momentum and rose throughout October, only to lose some sheen from mid-November and fall by 3.3% in November, the biggest monthly decline since May 2010, on concern that Ireland?s debt crisis will spread to other European countries, damping demand for riskier emerging-market assets.