A report by a foreign investment bank indicated that the rupee’s move beyond 69-70 against the dollar will not be sustainable as the authorities’ bias appears to be leaning against the sharp real effective exchange rates (REER) appreciation.
The rupee gained 38 paise on Friday to close at a one-week high of 70.94 against the dollar with dealers taking long positions on the currency as domestic equity markets saw huge buying post the announcement of fiscal stimulus measures by the government. On Friday, the benchmark Sensex made its biggest single day gain in a decade after closing the day’s session 1,921.15 points up at 38,014.62.
MS Gopikrishnan, independent market expert, agrees that positive sentiments in the equity market driven by the announcement of corporate tax cut had a spill over impact on the rupee. “Currency traders jumped in to buy the rupee on the back of expectations of fresh foreign investments into the Indian markets. The sentiments have been weak for a while which had lead to a build-up in short positions across trading desks, importers, exporters etc. With the current announcement, some of this build up is being unwound,” he said.
Foreign portfolio investors (FPIs) have remained sellers in the domestic equity market since the last few months having sold $5 billion worth of equities on a net basis since the beginning of July, according to Bloomberg.
A report by a foreign investment bank indicated that the rupee’s move beyond 69-70 against the dollar will not be sustainable as the authorities’ bias appears to be leaning against the sharp real effective exchange rates (REER) appreciation. “Indeed, the past few months of balance of payments (BoP) dynamics show that a material currency appreciation will not be tolerated,” it said.
MV Srinivasan, V-P at Mecklai Financial Services, said that after seeing the initial reaction in the market, importers are understood to have taken fresh hedge positions which may have pulled the currency close to the 71-level after the initial appreciation.
“The announcement is certainly a positive for foreign portfolio investments coming in to equities but we will have to see whether FPIs turn negative on bonds, which may lead to some outflows. Already the benchmark yield has moved higher from its previous close,” he said. “Going forward, the rupee is expected to trade in a tight range of 70.50 – 71.50 against the dollar. Traders will be closely watching the developments in the Gulf and regarding the US-China trade negotiations.”
In past three months, the rupee has depreciated 2.13% against the greenback, so far. The dollar index, which shows the strength of dollar against a basket of currencies, was trading at 98.40 on Friday.