Rupee’s advance is unsustainable, say analysts

The bounce in India’s rupee, that has made it the top performer among major Asian economies, is failing to win over traders.

The rupee has risen about 1 per cent in the past month, after falling by as much 1.2 per cent in October and November. Traders say that the fillip provided by a one-off corporate inflow of about $6 billion in recent weeks and a change in the central bank’s foreign-currency management strategy is unlikely to last.

The Reserve Bank of India (RBI) likely sold $130 million of foreign-currency assets in the week ended December 6, according to Bloomberg Economics. That compares with an addition of $17 billion to its forex reserves in the two months to November, which analysts say was the reason behind the rupee’s subdued performance during the period.

It seems that the RBI has stood out a little bit in letting the rupee strengthen, said Mitul Kotecha, a senior EM strategist at TD Securities in Singapore. “I expect any appreciation to be limited from here.”

The rupee may weaken to 73 per dollar by end of March, a drop of 2.6 per cent from Friday’s close, according to TD Securities and Commerzbank AG. That compares with a median estimate of 71.50 in a Bloomberg News survey. The currency is set for its eighth annual loss in 10 years.

The RBI has maintained that it intervenes in the foreign-exchange market to curb any undue volatility and does not aim at any particular level for the rupee. The central bank’s spokesperson declined to comment on the currency’s strength.

While the RBI’s surprise move December 5 to hold policy rates shocked the bond market, the move augurs well for the rupee. But the government can ill afford a strong currency as the nation’s exports have declined for four straight months, adding to the slowdown in the economy.

“If you leave it to the market, the rupee will strengthen to levels where the export competitiveness of a whole bunch of sectors will be impacted,” said Harihar Krishnamoorthy, treasurer at FirstRand Bank in Mumbai. “The case to allow the rupee to strengthen is not there.”