Rupee Was Expected To Fall To 70/Dollar, But Why The Opposite Happened

The rupee is among the best performing currencies this year.

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Rupee Was Expected To Fall To 70/Dollar, But Why The Opposite Happened

The rupee has gained nearly 6 per cent against the dollar so far this year.

Highlights

  1. Rupee had fallen beyond 68/dollar in January this year
  2. Many analysts had then predicted rupee to fall to levels of 72/dollar
  3. But rupee changed course and surged up to 63.58/dollar
Just a few months back, many economists were predicting that the rupee could breach the 70 levels against the US dollar. Some even predicted the rupee to hit 72/dollar by the year-end. The rupee had weakened beyond 68 per dollar in January this year, not very far from its all-time lows. The dollar was soaring against other currencies too on hopes of pro-growth measures from the Trump administration to boost the US economy. Expectations were high that the US Federal Reserve would hike rates at a faster pace, which would also boost the US dollar.

But the rupee changed course. So far this year is among the best performing currencies in the world, rising over 6 per cent against the US dollar. It closed at two-year high of 63.58 against the dollar on Friday.
 10 Things To Know About The Rupee's Surge This Year

1) The rupee's rise comes in the backdrop of a surge in overseas inflows into the domestic stock and bond markets. Indian capital markets have attracted inflows of around $30 billion so far this year.

2) Low inflation, improving domestic economy, higher real rates and record foreign-exchange reserves have played a part in the rupee's strong showing.

3) Boosted by the inflows, the domestic stock markets have hit multiple highs this year. The Nifty is also one of the best performing markets in Asia rising over 20 per cent so far this year.

4) The International Monetary Fund (IMF) has said in its latest update that India's economic growth is likely to rebound to 7.2 per cent this year and 7.7 per cent next year, aided by several reform measures announced by the government including the GST.

5) The current account deficit has narrowed to just 0.6 per cent of GDP from a record 4.8 per cent in 2013, while foreign exchange reserves hit a record high of $389 billion as of July 14.

6) The momentum in the rupee remains strong and could see further gains, say experts. Global brokerage Morgan Stanley recently said that the dollar/rupee broke below the key support at 64, opening room for further upside in the rupee. Added Tushar Arora, senior economist at HDFC Bank: "Within the emerging market space, currencies with strong fundamentals could continue to gain despite stretched valuations - INR (rupee) falls in this category."

7) Traders also say that the dollar/rupee pair moving below 64 suggests that the RBI is comfortable with a stronger rupee and has refrained from intervening to cap broader gains in the domestic currency.

8) The rupee's gains also come in the backdrop of a weakening dollar which had briefly touched a 15-month low against a basket of major currencies on Tuesday before recovering modestly since then.

9) US political woes and lukewarm economic data pushed the dollar to multi-year lows and dampened expectations of another Federal Reserve rate hike this year. Though recent data showed growth in the world's largest economy picked up in the second quarter, but labour costs rose less than expected, stoking concerns that inflation will remain low. Hopes that the Trump administration will be able to push through tax reforms and economic stimulus in the near future, which are seen as dollar-positive factors, have also faded amid the political turmoil in the US.

10) Experts say that from hereon, the inflows and the broader dollar trend would determine the level of rupee this year. Some investors are growing skeptical about the outlook for foreign flows into Indian capital markets. They say that equity valuations look expensive after benchmark indexes surged to record levels. Global investors have also almost exhausted their purchase limits for Indian bonds.

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