Rupee at 55, strongest in a month on GAAR clarity, fund flows

The rupee rose to its strongest level in nearly a month on Tuesday on the back of dollar inflows into domestic equities, following clarity on certain taxation rules and supported by improved sentiment for foreign investments.

At 11:12 a.m., the partially convertible rupee was at 54.96/97 per dollar, after hitting 54.9550, its highest since June 7 and stronger than 55.43/44 at close on Monday.

On Monday, the rupee strengthened for the third straight session on the back of dollar sales by investors.

Portfolio investors have turned bullish after the Indian government released draft rules last week and said the general anti avoidance rules, or GAAR, would not apply retroactively, a big concern for such investors. They seem hopeful of meaningful policy reforms at home after Prime Minister Manmohan Singhtook charge of the finance ministry.

Indranil Sengupta, Chief Economist (India) at BoAML expects the rupee to remain around the 55 levels in the near-term and test 53 levels later in the year. “We expect to see a short-term rally in the rupee,” he told CNBC-TV18 in an interview.

While the growth outlook is weak with the monsoon playing truant, price trends are sticky. Given RBI’s priority to tackle inflation, even if it means sacrificing growth, monetary easing may be delayed further. According to Sengupta, the inflation reading is likely to be around 7.6% in the month of June. “We are expecting one more rate cut from RBI led by current growth situations,” he said.

According to rating agency Crisil, there is a 66 percent chance that the rupee will appreciate to around 50 per dollar by March-end 2013 provided certain measures are taken by the government urgently.

Measures like initiation of some policy measures to revive the sagging growth, no further worsening of growth and inflation and an easing of current account deficit due to softening of crude and commodity prices will help in the revival of the currency, the report said.

The note gave a chance of two in three for the rupee to appreciate to 50 levels to the dollar by the fiscal-end if there is improvement in the sentiment. Whereas, there is a one-third possibility of the rupee continuing to trade in the 55-57 range in case of a status quo in domestic policy setting, and no change in the eurozone problems and the ongoing global turbulence.

The rupee has lost over 27 percent since last August to earn itself the distinction of being the worst performing currency in Asia due to various factors like worsening of the current account deficit and dwindling capital inflows because of investor doubts.

During early trade today it gained 6 paise to the dollar and was trading at 55.55. The recent downfall has seen it touch an all-time low of Rs 57.32 to the dollar intra-day and a closing low of 57.14 on 22 June.

Crisil said the recent fall in the rupee is characterised by higher impact of the country’s rising vulnerability and relatively lower impact of external shocks.

The vulnerability arises from several factors like widening current account deficit, which touched a two-decade high of 4.2 percent last fiscal, declining import cover of foreign exchange reserves, a high private corporate debt servicing burden and slower growth, it said.

The shock element is much lesser as there are no events like the folding up of Lehman Brothers in 2008, in the US which are on the horizon, it said.

(curtsey : first post)

Rupesh Yatesh Dalal
Head Research Department

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