Mumbai: The rupee hit a 20-month high at 64.32 to the dollar on Friday on India's improving economic fundamentals, the government's resolve to push through tough economic reforms like the GST, the RBI's stand of not intervening in the forex market and doubts about sustained growth of the US economy. These factors combined to attract record foreign fund flows into the country.
The rupee has strengthened against all the other major currencies — euro, Japanese yen and British pound. Given that the factors strengthening the rupee are unlikely to change anytime soon, economists and forex market dealers said they expect the Indian currency to appreciate further. So far in 2017, aggregate net FPI inflow through debt and equities is $12.6 billion, compared with $787 million in 2016 and $13.1 billion in 2015. Of the total inflow this year, $6.7 billion has come through debt market, while another $5.9 billion has come into equities, official data showed.
"Indian macro-economic scenario continues to attract healthy foreign inflows with strong growth outlook amid stable inflation, lower fiscal deficit, benign CAD and continued policy reforms like GST. A powerful mandate in UP has increased investor optimism in further economic reforms from the Modi government," said Sajal Gupta, head (forex & rates), Edelweiss Securities.
Market players also said that despite the rupee's fast appreciation in recent months (see table), the RBI has not intervened in the forex market. This is probably because any intervention to stem the rupee's appreciation will infuse more liquidity into the market at a time when there is already excess liquidity. To address this situation, the RBI had raised on Thursday the reverse repo rate (which banks get when they keep their excess funds with the RBI) from 5.75% to 6%.
"The RBI's hands-off approach amid surging capital flows has been a key driver for the INR's (rupee's) appreciation. Besides the obvious cost of sterilisation amid ample liquidity, a stronger rupee also dampens inflation. The recent rebound in exports may have also given comfort to the central bank," Gupta said.
With a large import bill for the country in which crude oil contributes the most, a stronger rupee is good news for a large number of consumers since this can bring down the total import bill, provided total volume of imported items don't jump much. "A stronger INR has several macro implications such as lower import bills and lower imported inflation, and thereby less pressure on interest rates," said Siddhartha Sanyal, chief India economist, Barclays. "However, the cost-benefit analysis for the economy as a whole remains delicate and complicated with benefits for consumers and a challenge for a set of domestic import-competing companies/sectors," Sanyal said. An appreciating rupee, on the other hand, is bad news for exporters, especially major players in the software services and pharma industries, and also garments and textiles. Market players pointed out that in addition to a stronger rupee, IT and pharma majors also have the US government and policy-related issues to tackle.
Source: timesofindia.indiatimes.com