Exporters worry as rupee breaks free; further strengthening could spook exporters.

​MUMBAI: Bankers were inundated with calls from exporters eager to know how much more the rupee could appreciate after the local unit rose to an 11-month high of 58.62 to the dollar on Friday.

An appreciating rupee makes goods and services from the country uncompetitive in the global market. Though export competitiveness will not be affected at current rupee levels, any further strengthening of the local currency, say above 58, could spook exporters. Many bankers confirmed this to ET, but seemed divided not only on the circumstances under which the Reserve Bank of India (RBI) could intervene, but also on, at what level it could intervene to prevent a steep climb.

For instance, Vijayan Subramani, managing director, treasury & markets, India, DBS Bank — who expects the rupee to climb to 56 against the dollar over the next quarter — thinks the RBI will react only to excessive volatility and a disorderly market.

But Ananth Narayan, co-head of wholesale banking for South Asia at Standard Chartered Bank, said the 58-58.50 level would hold over the near term.

"RBI will probably continue to intervene and mop up dollars in the forward markets, covering its earlier sale of dollars against the Foreign Currency Non-Repatriable (FCNR) swap window. After all, it still has room to build its foreign exchange reserves, given the size of the country's external debt. In addition, the rupee is already overvalued in REER terms, and any further appreciation of the currency at this stage may endanger a nascent recovery. In the short to medium run, expect 58- 58.5 to hold," he said.

Indian companies that raised foreign currency loans when the rupee was relatively weak, will also gain as they will have to pay fewer rupees to buy dollars than previously. The thumping victory of the BJP-led NDA in the national level elections may trigger an inflow of dollars from foreign investors into India's stock markets which, in turn, could further boost the rupee. This has worried exporters.

The local unit on Friday closed at 58.78 against the dollar, up 51 paisa, or 0.86%, from its previous close of 59.29 to the dollar. During the day, it rallied to 58.62, the strongest level since June, 2013 but later it erased its early gains on profit booking and suspected intervention by the Reserve Bank of India (RBI).

During Friday's trades, some large nationalised banks were seen buying dollars at 58.68 level, which in turn, brought down the rupee hitting an intra-day low at 59.10 against the greenback. RBI may have bought around $200-300 million to check further appreciation, dealers said. India's forex reserves were at about $275 billion on August 30, 2013; compared with $313 billion as on May 16, 2014. It has been rising since Raghuram Rajan took over as the bank's governor in September.

According to an HSBC report, "The Indian rupee has taken the indications from the election results positively and this should help the currency extend some of its positive tone, seen over the past week. The election euphoria could push the rupee lower towards the 58 level."

The rupee has appreciated nearly 5% this year, compared to a fall of 11.5% in 2013, making it one of the best performers among Asian emerging markets. The Indian currency had hit an all-time low of 68.85 against the dollar in August last year.

"The election outcome definitely sets the stage for reforms but things need to be followed by concrete and decisive actions," said Anindya Dasgupta, head treasure & managing director at Barclays. Higher overseas fund flows are likely to come on the back of political optimism, which would help the rupee rise against the greenback. "But the central bank is expected to intervene against any sharp appreciation although the current level may not be hurting export competitiveness in the country," he said.

RBI intervention may not necessarily fuel rupee liquidity into the system. During FCNR schemes, RBI sold rupee and now it will buy dollars from the forward market squaring off the positions.

Source : economictimes.indiatimes.com