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Nachiket Kelkar
Nachiket Kelkar

CURRENCY

Rupee settles at 20-month high against US Dollar

indian-rupee-notes-reuters15317 The Rupee has appreciated more than 5 per cent so far this year and comes on the back of strong inflows into financial markets by foreign institutional investors | Reuters

Buoyed by continued foreign investor inflows in India's equity markets, the Rupee strengthened further against the US Dollar on Wednesday to close a fresh 20-month high. The markets also continued to surge upwards with benchmark indices trading at record highs.

Earlier in the day, the Rupee appreciated past the 64 mark to hit a high of 63.93 to a Dollar, this was a level last seen on August 10, 2015. It finally closed at 64.12 to a Dollar, up 16 paise or 0.25 per cent from the Tuesday's close of 64.28.

The Rupee has appreciated more than 5 per cent so far this year and comes on the back of strong inflows into financial markets by foreign institutional investors. FIIs have so far this year pumped in Rs 42,113 crore in the equity markets, while a further Rs 48,650 crore has been invested in debt markets, taking the total FII investment in India's financial markets to Rs 90,762 crore since beginning of January 2017.

“With Reserve Bank of India turning hawkish, Indian interest rates became far more attractive for carry traders. The government also stuck to its fiscal measures in the budget. A tight fiscal policy, a relatively tight monetary policy and low inflation are a combination encouraging capital flows,” said Anindya Banerjee, associate vice-president, currency at Kotak Securities.

Currency carry traders essentially sell a certain currency with a relatively low interest rate and these funds are then used to purchase a currency yielding higher interest rate. 

Earlier this month, the RBI left the repo rate unchanged at 6.25 per cent, while raising the reverse repo rate to 6 per cent. The minutes of the monetary policy committee meeting released by the central bank also showed that at least one of the committee members was in favour of raising interest rates given that inflation was set to go up this year.

Banerjee said that while RBI has been intervening in the market to slowdown the Rupee appreciation, the strong capital flows are pushing the Rupee higher. Excess liquidity in the money market was also a reason RBI was not very aggressive in buying Dollars, he added.

“Government will probably be comfortable with the Rupee appreciation, as we ultimately are dependent on foreign capital. If we are to attract more foreign capital, issue masala bonds among other things the Rupee has to be strong,” said Banerjee. 

While importers will rejoice from a stronger Rupee, export-oriented companies, like those in pharmaceuticals and software services companies will feel the pinch of the appreciating Rupee.

Meanwhile, the strong FII flows have driven equity markets sharply higher; on Wednesday, the BSE Sensex closed above the 30,000 mark for the first time. The benchmark index rose 190 points or 0.6 per cent to end the day at 30,133.35. The NSE Nifty 50 index traded well above the 9,300 mark it had hit for the first time on Tuesday and closed at 9,351.85, up 45 points or 0.5 per cent.

The investors are upbeat of strong economic and earnings growth going ahead, said Pankaj Pandey, head of research at ICICI Securities.

“Earning growth would be the key factor driving the markets from hereon. We highlight that with enabling fundamental factors such as stabilised commodity base, upbeat consumption and most importantly, a favourable low base, the earnings from hereon, could witness a strong double digit growth recovery in fiscal 2018 and thus drive the market momentum,” said Pandey. 

The surge in equity markets has also been driven a relief rally triggered by centrist leader Emmanuel Macron's first round win in the French presidential polls.

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Topics : #rupee

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