Indian currency: Foreign direct investment may push Rupee to new heights

MUMBAI: The rupee, among the best-performing emerging-market currencies this year, is poised to gain 4 per cent more against the dollar by March on sustained overseas flows unless a surprise hardening in US rates or premature shrinkage in Fed balance sheet triggers a safe-haven rush.

Taxation and sectoral-ownership reforms should otherwise continue to enhance India’s attractiveness as a destination for debt, equity, and foreign direct investment (FDI). According to an ET poll of 20 financial-market participants (see table on page 12), foreign portfolio investments (FPI) should underpin rupee’s ascent to 61 versus the dollar by March. Six of those polled said the rupee could be in the 58-62 range by end-FY18. On September 15, it closed at 64.08.

US Fed Action
“The general consensus is that the rupee would rise amid overseas fund inflows,” said Jayesh Mehta, MD and country treasurer at Bank of America Merrill Lynch in India. “A combination of FPI and FDI may continue to drive the rupee in the coming quarters. The central bank’s intervention is evident and the currency would have crossed new highs otherwise.”

This calendar year, FPIs have invested a net Rs 1.74 lakh crore in Indian securities, with debt cornering the largest share in investments that are the highest since 2014. Overseas funds should continue to flow into Indian assets, with several high-profile initial public offerings scheduled. To be sure, US Federal Reserve action could swiftly reverse the direction of the rupee’s movement.

Last week’s data showed US consumer prices rose 0.4 per cent month-on-month and 1.9 per cent on-year in August, with the gauge appearing to inch closer to the central bank’s benchmark inflation goal.

A sustained improvement in US consumer prices and falling jobless claims should shorten the odds of a rate increase, but only in December or even later. Fed policymakers meeting this week are likely to refrain from taking any rate action purely on the August inflation data, although they might announce a phased and calibrated contraction of a bloated balance sheet.

“The global liquidity tightening could well weigh on the rupee’s move (against the dollar), as such an event may lead to fund outflows from emerging markets,” said Sujan Hajra, chief economist at Anand Rathi Securities. “If the US economy gets back to life with improving macroeconomic data, it would prompt investors to seek the safety of dollars amid a global shortage of easy money.”

India’s foreign exchange reserves have surged to a record $400 billion, giving policymakers the confidence that there is enough cushion to deal with sudden dollar outflows. The currency market is bracing for more intervention from the Reserve Bank of India (RBI) in shoring up the dollar stock amid a widening trade deficit. RBI doesn’t have any stated target for the rupee but its interventions are generally aimed at curbing volatility. Also, a strong rupee will hurt exports at a vulnerable time for the economy.

India’s current account deficit, or the excess of imports over exports, widened to 2.4 per cent of gross domestic product in the June quarter, up from 0.1 per cent in the year-ago period.

Foreign direct investment may push Rupee to new heights

“The latest data show that the RBI has failed to fully mop up the capital inflows,” said Anindya Banerjee, currency analyst at Kotak Securities. “There is further room for RBI intervention, as the demand for rupee-backed assets has not yet run its full course.”

Some participants believe the widening current account deficit is a temporary problem, as falling oil prices should help bridge the gap. Oil prices fell about 3 per cent Friday on record OPEC exports. Brent crude fell that day to $46.28, its lowest in more than a week.

“The rupee is a function in relation to all major currencies,” said Satyajit Kanjilal, founder of Forexserve, which has the most bullish prediction for the currency at 58 to the dollar.

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