Rupee Strength May Persist On Strong Capital Flows
Bank of America’s Jayesh Mehta does not believe the local currency is overvalued at current levels.
The Indian Rupee continued to move higher on Thursday, pushing up the currency to its best levels since October 2015. While the initial surge in the rupee followed the weekend verdict of state elections which strengthened the position of the ruling Bharatiya Janata Party (BJP), Thursday’s gains resulted from the U.S. Federal Reserve’s overnight decision.
As expected the Fed raised rates by 25 basis points but suggested a moderate pace of rate hikes over the rest of the year. The Dollar Index slipped sharply following the Fed’s commentary, which, in turn, pushed up Asian currencies.
The Indian Rupee hit an intraday high of 65.24 but slipped during the session to close at 65.41 against the dollar compared to the previous close of 65.69.
The flows into Indian equities have been “immediate” and “large” said Jayesh Mehta, country treasurer for Bank of America, which has led to the impressive rise in the value of the local currency. Mehta expects the inflows to continue at least until the close of the current financial year on March 31.
Foreign inflows which had dried up over the past few months have rebounded in March. Foreign investors have bought $2.3 billion in Indian debt and equity in March so far, shows data from the National Securities Depository Limited (NSDL).
The pick-up in flows has meant that the Indian rupee is Asia’s only gainer against the U.S. dollar this month. For the year to date, the rupee is the third best performer in Asia after Korean Won and the Taiwanese Dollar.
Technically, too, the rupee is looking strong, said Bhaskar Panda, Senior Vice President - Treasury at HDFC Bank Ltd.
“It has broken its 100-day simple moving average for the first time in nearly four to five years. So, the rupee appreciation is likely to continue for a while,” he told BloombergQuint in an interview. Panda expects the rupee to appreciate towards 64.80-64.65 against the dollar.
The rupee’s 1.7 percent gain over three days has pushed the Reserve Bank of India (RBI) into action. According to multiple reports on Bloomberg, state owned banks have bought dollars on behalf of the RBI to slow down the gains on the rupee. Despite that, the sharp move in the currency indicates that the central bank’s tolerance for an appreciation in the currency has increased, ICICI Bank Ltd. said in a note dated Wednesday.
“While we are positive on the rupee trajectory in the near term amid strong capital inflows, from a medium term perspective, we expect rupee to trade in the range of around 66-66.50 levels by the end September and gradually depreciate towards 67-68 levels by end March 2018,” the ICICI Bank note read. From a medium term perspective, dollar strength as well as volatility in capital flows could lead to two-way movement on the currency, it added.
The policy stance by the Trump administration remains an overhang on the rupee, said Mehta. “Keep watching the U.S. 10-year for cues on the rupee’s trajectory.”
Mehta also expects the rupee strength to force the RBI to take a re-look at its monetary policy stance. “One of the key reasons for the RBI to shift to a neutral stance was rupee depreciation and oil appreciation. Both have not come true. So it would be interesting to see what is their April stance,” he said adding, “I am hoping for a rate cut.”