The rupee on Tuesday closed at almost a two-and-a-half-year high of 63.48 against the greenback with the dollar losing ground against most Asian currencies. Reports indicate there is a general consensus in the US that the Fed will be cautious on its rate hike stance if inflation does not rise to the targeted levels. As a result, the US market has been factoring-in two rate hikes in 2018 compared to the earlier assumption of three hikes. The rupee has been strengthening against the greenback for four consecutive sessions while the dollar index fell to a three-month low of 91.84. On an intraday basis, the currency touched as high as 63.43 before closing 19 paise higher than Monday’s closing. MV Srinivasan, vice-president at Mecklai Financial Services confirms that the rise in the rupee can be attributed to the weakness in the dollar and indicates that many participants are believed to have taken a short position on the greenback. “One other factor that is believed to have pushed the Rupee higher is the corporate bond investment limit auction for foreign investors on Tuesday. The market is anticipating good inflows into corporate debt and as a result, market participants are building up long positions on the rupee,” he said.
On Wednesday, Rs 13,756 crore of investment limits in corporate bonds will be auctioned to foreign portfolio investors (FPIs). As a result, certain market participants are believed to have taken a short position on the dollar in anticipation of significant inflows. However, the rally in the rupee might be short-lived considering that oil prices are on the rise and inflation outlook remains bleak. As on Tuesday evening, Brent crude was trading at $66.86/barrel after having scaled to the level of $67.29/barrel in the afternoon. Since last week, Brent crude has continued to stay above the $66/barrel level. “It is likely that the rupee might see some weakening in the near future as high oil prices continue to remain a concern. The budget has factored-in the oil price at $55/barrel and the current levels are way above it,” Srinivasan added.
The market is also watching out for the consumer price index (CPI) inflation data for the month of December which is set to be released next week.The Reserve Bank of India had stated in its fifth bi-monthly policy that the impact of house rent allowance by the government is expected to peak in December. “On the whole, inflation is estimated in the range 4.3-4.7% in Q3 and Q4 of this year, including the HRA effect of up to 35 basis points, with risks evenly balanced,” RBI had said.