Indian rupee hit a 20-month high at 64.32 to the dollar last week, on India's improving economic fundamentals, government's resolve to push through tough economic reforms like the GST, and the RBI's stand of not intervening in the forex market. The rupee strengthened against all the other major currencies; euro, yen and pound.
"Indian macro-economic scenario continues to attract healthy foreign inflows with strong growth outlook amid stable inflation, lower fiscal deficit, benign CAD and continued policy reforms like GST. A powerful mandate in UP has increased investor optimism in further economic reforms from the Modi government," said Sajal Gupta, head (forex & rates), Edelweiss Securities. Given that factors strengthening the rupee are unlikely to change anytime soon, economists and forex market dealers said they expect the Indian currency to appreciate further.
Market players also said that despite the rupee's fast appreciation in recent months, the RBI has not intervened in the forex market. "The RBI's hands-off approach amid surging capital flows has been a key driver for the rupee's appreciation. Besides the obvious cost of sterilisation amid ample liquidity, a stronger rupee also dampens inflation. The recent rebound in exports may have also given comfort to the central bank," Gupta said.
A stronger rupee has several macro implications such as lower import bills and lower imported inflation, and thereby less pressure on interest rates,” said Siddhartha Sanyal, chief India economist, Barclays. “However, the cost-benefit analysis for the economy as a whole remains delicate and complicated with benefits for consumers and a challenge for a set of domestic import-competing companies sectors,” Sanyal said.
An appreciating rupee, on the other hand, is bad news for exporters, especially major players in the software services and pharma industries, and also garments and textiles. Market players pointed out that in addition to a stronger rupee, IT and pharma majors also have the US government and policy related issues to tackle.
