Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Rupee Hits Six-Week High, But Is It Sustainable? 

The rupee, the year’s worst performing Asian currency, appreciated to its strongest in six weeks in early trades before erasing most of the gains tracking emerging market peers as the U.S. Federal Reserve stuck to its plan to lift rates gradually.

The Indian currency strengthened initially as India’s monetary policy committee’s decision to hike benchmark rates by 25 basis points for the second straight time to curb inflation is expected to provide support. The Reserve Bank of India also maintained the growth outlook for the economy, projecting an expansion of 7.4 per cent in 2018-19.

Also read: India's Central Bank Flags Currency Wars as It Hikes Rates

The RBI has balanced the growth-inflation dynamics keeping in view the unfolding global and domestic scenarios, V S Parthasarathy, chief financial officer of the Mahindra Group, said. The rate hike should help temper inflation and hopefully provide support to the rupee.

The currency opened at 68.39 to a dollar and strengthened to 68.27. It, however, lost ground to trade 0.06 percent weaker at 68.47 at 12:50 p.m.

Rupee Hits Six-Week High, But Is It Sustainable? 

Most Asian currencies fell after the Federal Reserve stuck to its plan to gradually lift borrowing costs. Fed left the U.S. interest rates unchanged but said the economic activity has been “rising at a strong rate”, indicating that it’s on track for two more hikes this year.

What Experts Says

Hao Zhou, senior emerging markets economist at Commerzbank said the U.S. economy remains in a sweet spot and he expects the Fed to hike rates in September and December. The commentary by the Fed was seen as backing bets for a rate hike, he said. “We remain cautious on emerging markets due to currency pressure and bullish on advanced economies now.”

The rupee has weakened 6.7 percent so far this year as rising fuel prices widened India’s trade deficit and triggered a selloff by foreign investors. That put pressure on the Indian currency.

The pace of outflows, however, eased in July. Foreign funds withdrew the least in four months as crude came off the $80 level.

Re-emergence of foreign funds on the back of high-profile GDR issues has predominantly helped the rupee’s upmove, K Harihar, head of treasury, First Rand Bank. FIIs bought debt worth Rs 700 crore yesterday; higher demand for debt reduces interest rates and hence the rupee strengthens, he said.

“Also, the hike in the repo rate along with upbeat comments on growth supported the positive sentiment.” Harihar expects the currency to trade at 68-69 against the dollar in the near term.

Abhishek Goenka, founder and chief executive officer at India Forex Advisors, said the rupee strengthened with the RBI selling at higher levels, and a drop in crude and the hike in policy rates provided support to buyers of government securities. The only concern is a continuous weakness in the Chinese yuan, trade war between the U.S. and China or any impending reversal in Indian stocks or vulnerability due to oil prices, he said.

Goenka, while ruling out extreme depreciation, said the medium- to long-term trend for the rupee is still bearish but it could strengthen till 68 against a dollar.

Yuan is a concern for Rajiv Shastri, executive and chief executive officer of Essel Mutual Fund, too. With the Chinese currency depreciating and exerting a downward pressure on the rupee and other export-oriented currencies, he said imported inflation is a potential threat.