The Hindu Business Line : Rupee gains; ‘bound to strengthen further’

Mumbai, July 31 Triggered by a hike in the Cash Reserve Ratio by 50 basis points, the rupee strengthened by seventeen paise against the greenback on Tuesday.

Market participants feel that with the kind of inflows the country is witnessing, the rupee is bound to strengthen further. “The rupee also rallied because of the good performance in the domestic stock market today,” said Mr V. Rajagopal, Head-Forex Treasury, Kotak Bank.

The home currency opened at 40.46/47 level and closed at 40.38, up from the previous close of 40.55.

Money supply

Forex dealers feel that the money supply growth still continues at levels well above the central bank’s comfort zone, possibly seeding fresh inflationary pressures for the future.

Ms Naina Lal Kidwai

“The excessive money supply growth is, of course, primarily on account of the rush of overseas investment flows that continue to pour into Indian equity markets and through the ECB and FDI routes,” said Ms Naina Lal Kidwai, Group General Manager and Country Head, HSBC India.

Talking about rupee appreciation, Mr Ravi Pai, Head-FX and Derivatives, Treasury, HDFC Bank, said, “Over a medium term, rupee will depreciate at a slow and steady pace due to covering of short positions, but eventually it will strengthen, though it would not go below 40 levels.”

Mr Mohan Shenoi, Group Head-Treasury, Kotak Mahindra Bank, said: “The RBI allowed the rupee to appreciate sharply not too long back but more recent trends indicate a resolve to prevent any further appreciation.”

He felt that the RBI’s fight against foreign currency inflows is likely to continue and pose a challenge so far as liquidity management is concerned. “To this end, the RBI has resolved to actively manage liquidity through use of CRR, OMO, LAF and MSS,” he said.

“With the cap of Rs 3,000 crore on reverse repo being removed and with the hike in CRR, the rupee is bound to strengthen to 40,” said Mr Bhaskar Ghose, Managing Director and CEO, IndusInd Bank.

He, however, felt that if the RBI acts aggressively to halt rupee appreciation, easy liquidity would continue and nullify the impact.

In forwards, the six-month premia closed at 1.64 per cent (1.04 per cent) while the 12-month closed at 1.67 per cent (1.26 per cent).