Rupee at 9-month high of 59.67 as stocks surge on hope of NDA win.

​MUMBAI: The rupee closed below the 60-level for the first time since April 2 as the euphoria in the stock exchanges had its impact on the foreign currency markets. The local unit ended at a nine-month closing high of 59.67, a gain of 37 paise from Monday's close after exit polls predicted that a National Democratic Alliance government would come to power at the Centre.

The rupee opened higher at 59.70 and touched an intra-day high of 59.59 before closing lower at 59.67. Dealers said that part of the reasons for the rally was renewed buying by foreign institutional investors in the equity markets. The strengthening rupee will make all imports cheaper and reduce pressure on government finances as it brings down the burden of oil subsidies. But exporters warn that gains in the current account deficit would be lost if the rupee remains below 60.

"The fact that the rupee managed to close below 60 seems to suggest that there is a market comfort as well as a regulator comfort with the rupee strengthening," said Harihar Krishnamoorthy, treasurer, First Rand Bank. He added that while the forex market does get influenced by sentiment as, at the end of the day, it is the demand and supply that matters. "After a point, it is the normal factors such as FII inflows that will determine the level. Markets will watch to see if FII inflows are just being front-loaded or whether they continue with budget and other measures. If the GDP is indeed bottoming out, non-oil imports will rise. This is good from the economy point of view but it is negative for the dollar-rupee," he added.

"We view exit polls with some caution based on the results in 2004 and 2009, and especially in this case where there appears to be a differential between them and the majority of pre-election opinion polls. Additionally, the bar to exceed expectations on the final counting day (May 16) has moved even higher. However, notwithstanding a possible knee-jerk market reaction on May 16, the exit polls confirm and strengthen our baseline expectation of a stable NDA-led government, which is a positive outcome, in our view," said Sonal Varma of Nomura Securities.

In the short term, future movement of the rupee will depend on the election results and the budget. Besides this, markets will look at signals from the rating agencies. The rise in the stock market indices raises the possibility that more companies will tap domestic and international markets with equity issuances.

According to Krishnamoorthy, investors are looking out for decontrol of administered prices for diesel or gas in the budget which will reduce the burden of subsidies on government finances. "This can either mean lesser borrowing or freeing up resources to productive segments. The strengthening rupee will reduce the subsidy numbers and some of the rise in stock prices seems to be factoring in general decontrol," he added.

Source : timesofindia.indiatimes.com