Leaving behind the battering it took last year, the Indian rupee has begun 2019 on a strong footing thanks to robust foreign inflows into equities.
On March 18, the currency closed at a seven-month high of 68.53 to the US dollar, taking its net gain this calendar year to 1.8%, compared with a depreciation of 8.46% in 2018. From being Asia’s worst-performing currency last year, it is now the best-performing among emerging markets this year.
Yet, analysts wonder if the appreciation will last.
Its recent rise is backed by strong dollar inflows, a weakness in the US currency, and optimism that prime minister Narendra Modi’s Bharatiya Janata Party (BJP) will be reelected in this year’s general election, they believe.
Such optimism has opened the gates to over $2.4 billion of inflows into equities this month, taking the net foreign inflows to $4.7 billion this year, the highest in Asia. Here’s a look at the foreign portfolio investments/foreign institutional investors investment that has helped prop up the rupee:
In the next few weeks, the rupee may continue to appreciate but it is unlikely to sustain for long.
“Typically, ahead of the elections, there is volatility in the currency as well as the equity markets. But strong investor sentiment has led to one round of appreciation in the rupee which may continue for some more time but is not likely to sustain,” said Navneet Damani, vice-president of commodity research at Motilal Oswal Financial Services.
The fact that crude oil has also remained largely stable is also helping the rupee inch up. Most analysts are now expecting the rupee to stablise around 68.70 to 68.40 levels in the short-term, in the best-case scenario.
Meanwhile, exporters are clearly disappointed. “Such sharp appreciation is causing concern both among the exporters and importers as uncertainty in the exchange rate is driving volatility,” Ganesh Kumar Gupta, president of the Federation of Indian Export Organisations, said in a release on Monday.
The industry body is hoping the rupee stabilises at 70 to a dollar which may be likely considering that analysts expect it to depreciate in the coming months.
“Even in the last elections, we had seen that rupee had appreciated significantly but then it had corrected later as the market had already factored in all the good news, and it is likely that we may see something similar even this time around,” said Sajal Gupta, head of forex and rates at Edelweiss Securities.
Besides, last week, the Reserve Bank of India announced a $5-billion plan to swap rupees for dollars with domestic banks. The auction is likely to be held on March 26 and will help the central bank to mop up dollars and pump in rupee, which will stall any further sharp appreciation.