Sustaining rupee appreciation will be a challenge, feel experts, after the Finance Ministry expressed hopes that the rupee would strengthen to 50 against dollar in 2-4 months.
Rising over 250 paise in the past fortnight, the rupee gained the most in 13 quarters on the expectation of higher foreign institutional investor (FII) inflows due to government-backed reform measures on FDI (foreign direct investment) and diesel price hike.
“This (rupee appreciation) brings down the subsidy requirement, especially in the petroleum sector. With the steps the Government is taking, we expect it could even touch Rs 50 in the next 2-3 months or four months, in which case our subsidy burden will go down even further,” Department of Economic Affairs Secretary Arvind Mayaram said.
This hope has come at a time when rupee closed at a five-month high of Rs 52.85 against the dollar on Friday. Further, the Prime Minister has asked the Finance Minister P. Chidambaram to take steps to arrest the volatility in Indian currency.
Last week, the government also maintained its original borrowing plan as budgeted for financial year 2012-13. “The rupee appreciation is a sentiment booster and can be taken care of for some time. But sustaining the rise is more important. Globally, the FIIs are driving the markets as there is lot of liquidity. However, this is limited to the trading activities and it must trickle down to the real sector reviving projects and investments,” said Biswa Swarup Misra, Associate Dean, Xavier Institute of Management, Bhubaneswar.
The rupee has depreciated significantly from Rs 44 against the dollar in August 2011 to its lowest at 57.32 per dollar on June 22, 2012. However, with rising global and domestic sentiments, it has recovered to 52 levels last week.
On Friday, the domestic currency jumped to a five-month high closing at 52.88 against the dollar as foreign inflows and reforms measures continued to back the rupee.
“With the recent measures, we will see a surge in the portfolio FIIs. Much will depend on the amount of inflows during the next few months for the rupee to rise further. Post the announcements, FIIs are no more underweight on India. Hence, for now, we are likely to see the rupee in 52-54 range till December,” said Ashish Parthasarthy, Head of Treasury, HDFC Bank.
Euro Zone crisis
The rupee has also been tracking the euro since the Euro Zone crisis represents global risks. However, Parthasarthy says, “Every currency has different dynamics. Hence, rupee movement will be impacted more from the implementation of domestic measures and FIIs.”
Misra believes that the RBI’s rate cut can further support the investments and thereby drive the currency upwards.
Net FII inflows that had turned negative in April and May have surged in August and September. FII net investments (including equity and debt) stood at Rs 76,519.60 crore in January to July.