The Indian Rupee may see sharp appreciation on the back of measures taken by the central bank and the government as the decline was largely driven by “fear trade”, analysts at Credit Suisse said in a note on Friday. The bank says the rupee can reach 57-58 levels though the RBI may try to stem the volatility by starting to build reserves at 60.
The resumption of foreign capital inflows could also lead to a significant balance of payment surplus and help the rupee, the investment bank said. “The 30th September USDINR level will thus be important: if USDINR goes back to 60 by then, the translation impact will be near zero as USDINR was 59.40 on 30th June, but mispriced import and export hedges or complex currency derivatives are likely to get exposed,” the analysts wrote.
The rupee gained marginally on Friday, wrapping up its best week in nearly fifteen months as foreign funds flowed into equities on the back of a rebound in risk assets as geopolitical risks abated.
The focus is now squarely on the U.S. Federal Reserve’s meeting on September 17-18 at which it is expected to announce a trimming of its bond buying.
Emerging Asian currencies have been under pressure with investors trying to guess how much the Fed will cut its monetary stimulus next week. However, disappointing U.S. data recently has led to hopes that the Fed may limit its stimulus withdrawal.
India is particularly vulnerable to any tapering as it suffers from both a large current account deficit and a fiscal gap.
Easing concerns over any imminent strike on Syria by the United States have also helped risk assets.
“I do not think that the Fed will be in a rush to taper as data out of U.S. has not been consistent. A lot of it has been factored into recent emerging market FX,” said Subramanian Sharma, director at Greenback Forex.
“However, the rupee’s recent recovery has been too fast and too big. I do not think it will sustain based on fundamentals and it may fall again to 64.50 levels.”
The rupee ended at 63.49/50 to the dollar versus 63.50/51 last close. Dealers cited some central bank intervention in late trading.
It gained 2.76 percent in the week, its best since June 2012.
The Indian currency has been boosted by strong foreign fund buying in equities totaling over $1 billion in the six sessions to Thursday.
However, domestic concerns persist, with growth outlook still remaining muddled. The Prime Minister’s Economic Advisory Council sharply cut its fiscal year growth forecast to 5.3 percent from 6.4 percent and said meeting the budgeted fiscal deficit of 4.8 percent may be a challenge.
Reserve Bank of India chief Raghuram Rajan will detail his first monetary policy review on September 20 which will be closely watched to see whether the central bank will give any signs of when it plans to begin withdrawing its cash tightening steps it launched in mid-July to stabilize the rupee.
In the offshore non-deliverable forwards, the one-month contract was at 64.33 while the three-month was at 65.61.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed around 63.79 with a total traded volume of $3 billion.
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