Rupee poised to climb high against dollar; will Narendra Modi do what Raghuram Rajan couldn't?
By Shilpy Sinha & Saikat Das, ET Bureau | 20 Mar, 2014, 07.48AM IST
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Having touched a historic low of 68.84 against the dollar last August, it ended at 60.95 on Wednesday, up 0.39% from the previous close.
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MUMBAI: The
rupee could gain as much as 6.5% in the next three months as international investors pump in dollars to buy
stocks and bonds, hoping to benefit from a stable government they see being headed by BJP's
Narendra Modi after the elections, delivering an economic revival.
The rupee, which has posted a dramatic turnaround from being the worst performer among emerging market currencies to the best in a matter of months, is poised to climb to as high as 57 against the dollar, according to an ET poll of strategists and traders.
Having touched a historic low of 68.84 against the dollar last August, it ended at 60.95 on Wednesday, up 0.39% from the previous close. From its alltime low, the rupee has appreciated about 11.43%. So far in March, the local unit has risen about 1.74% against the dollar. The median estimate for the rupee is 60, ET's poll of 15 traders shows. The range runs from 57 to 60, depending on what the poll outcome will be.
The currency appreciation, which began after Reserve Bank of India
Governor Raghuram Rajan put in
place several rescue measures, is gathering further momentum with opinion polls putting Modi, the BJP's prime ministerial candidate, in the
lead of the race to head the government after the April-May polls. An opinion poll conducted by Times NOW-C Voter shows the BJP-led National Democratic Alliance getting 227 out of 543 seats and the ruling Congress-led United Progressive Alliance 101.
Weak govt will affect market sentiment
"If we get a government which has sufficient majority by itself or an effective coalition that demonstrates the capacity to execute and displays an appetite for good governance, the rally will sustain and the rupee, I expect, will touch 57-58 in less than three months," said Vijayan Subramani, head of treasury and markets, DBS Bank India.
The rupee's fortunes have changed rapidly since Rajan ordered measures to boost
foreign exchange reserves through a deposit scheme that raised $34 billion. Furthermore, the
current account deficit, the excess of spending overseas over earnings, narrowed to 0.9% of the gross domestic
product in the December quarter, from a record 6.5% a year ago. This, along with RBI's signal that it wants to see consumer price
inflation tamed to about 4%, has boosted the confidence of international investors.
Foreign funds, which sold Indian assets last year due to weakening macroeconomic fundamentals, have bought
shares and bonds worth $7.7 billion since January. Many forecast an acceleration in fund flows but also warn that the tide could turn equally fast if Modi fails to become
prime minister.
"If we get the right government, equity flows will be buoyant and the rupee would climb," said Jayesh Mehta, head of global
markets at Bank of America Merrill Lynch. "If there is an unstable government, there could be a $5-billion withdrawal from the
stock market and we may go back to 68-to-a-dollar level."
Although investor sentiment is pushing up the rupee, some believe that an unexpected electoral outcome won't necessarily have such an extreme effect given that some semblance of normalcy has returned to the external account. Even if import restrictions on
gold are lifted, the demand may not be much as financial assets could turn attractive. The gold curbs played a key role in reining in the current account deficit.
For one thing, inflation is easing, giving comfort to investors that at least by the end of the year RBI may begin an interest rate easing cycle, reducing the burden on companies with debt repayments, which will help reviving investment.
Retail inflation as measured by the
consumer price index, or CPI, dropped to a forecast-beating 25-month low of 8.10% in February compared with 8.79% in January.
Inflation based on the
wholesale price index, or WPI, fell to a ninemonth low of 4.68% in February on the back of a drop in food and fuel prices. It was at 5.05% in January. But global events could play spoilsport, said some.
"Any worsening in geopolitical tension will lead to a rise in oil price, which in turn will impact rupee movement against the greenback," said NS Venkatesh, head (treasury) at IDBI Bank. "Globally, investors would seek the safety of the US dollar." Although the conflict between the West and Russia seems to have blown over for the moment, it could erupt again. The Syrian unrest may have taken a backseat because of the Ukraine issue, but could come back to the fore as well.
Even as many factors point to the appreciation of the rupee in the short term, and even in the long term if Modi becomes the prime minister, the RBI may choose to intervene to halt it from appreciating too much to a level where it starts hurting exports and encourages imports to the detriment of the current account deficit.
"As the rupee strengthens, RBI will step in to build reserves and protect exporters," said Ashutosh Khajuria, treasury head, Federal Bank. "If Modi comes, there will be expectations of capital flows coming in."
The central bank under Rajan is seen to have been actively vigilant on the currency markets and some believe it would step in to curb a surge. With the Chinese yuan depreciating in the past few weeks, RBI knows it can't afford to let the rupee go on a sprint.
