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Where is the Indian rupee headed?

Where is the Indian rupee headed?

Given that the earnings for exporters are largely denominated in dollars, the appreciation of the rupee dents their profits, if not hedged.

The Indian rupee has gained almost 4% against the dollar in the past month alone. It is currently trading at Rs 45.71 to the dollar, a level last seen in September 2008. Abeek Barua, chief economist at HDFC Bank, is not surprised by this change in fortunes given the dollar’s bearishness that has prevailed across markets. Concerns that the Gulf countries were considering an alternative currency for billing oil and pegging their currencies has further stalked the US currency. This phenomenon is not restricted to the rupee alone. Many other Asian economies have followed suit, which is probably why the RBI has not intervened to check the rise in the rupee.

Inching Upwards
Robust FII inflows after the elections are boosting the rupee
15 Oct ’0739.3
29 Oct ‘0849.7
9 Mar ‘0951.8
15 Oct ’0945.9
Figures are the value of a rupee against a dollar

The other factors supporting the rebounding rupee is the rise in FII inflows, which was to the tune of $9.5 billion in the first half of 2009-10, after the favourable election outcome and the resurgence in the equity markets. In 2008-9, FIIs were net sellers to the tune of $10.39 billion. This explains why the rupee slid to a low of Rs 52 against the dollar in March 2009. According to Barua, in addition to the equity market flows, other capital flows into the country have also picked up, which has impacted the rupee. So going ahead, the movement of the currency is no longer likely to be a simple play on equity markets; external commercial borrowing, foreign direct investment (FDI), trade credit and other debt flows will also play a critical role.

Although this spells good news for those planning to travel abroad—you will now pay fewer rupees for buying every dollar—exportheavy companies have cause for concern.

Given that the earnings for exporters are largely denominated in dollars, the appreciation of the rupee dents their profits, if not hedged. However, an analyst at Religare Capital Market says that IT may not be hurt as badly as other export-oriented sectors as these companies have some leeway in maintaining margins by way of portfolio diversification. Also, the hedging tools that they can deploy are more feasible. The increase in volumes anticipated in the IT sector too is expected to offset the negative impact of the rupee movement. The bottom line? It may be worthwhile to check the movement of the rupee and how individual companies are hedged.

The good news is that this appreciation in the rupee is expected to continue and analysts unanimously predict that it will trade in the range of Rs 45-46 by the end of the year. In fact, Religare Capital Markets expects it to touch Rs 42-43 in the fourth quarter of 2009-10. As international fund managers seek to bulk up their profits in the last quarter of the calendar year, it could lead to another flood of dollars in the equity markets before the new year.

However, we could see some reversal in this trend if the equity markets witness a correction, which is a possibility as valuations look stretched. A hike in interest rates could play party pooper too. Of course, all this is assuming that the RBI does not change its stance of non-intervention to check the uptrend if the rupee level falls below Rs 46.75 per dollar.

Published on: Nov 05, 2009, 5:02 PM IST
Posted by: AtMigration, Nov 05, 2009, 5:02 PM IST