This Article is From Aug 07, 2017

Why Rupee Is Among The Best-Performing Currencies Vs Dollar This Year

Strong inflows into domestic capital market and macro-economic fundamentals have helped rupee post big gain against the US dollar this year.

Why Rupee Is Among The Best-Performing Currencies Vs Dollar This Year

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

The rupee weakened against the dollar today falling to 63.73, against Friday's close of 63.58. Despite the dollar's pullback, the rupee remains one of the best performing currencies in the world so far this year, rising around 6 per cent against the greenback. The dollar had posted its biggest one-day gain this year on Friday after data showed US non-farm payrolls rose by 209,000 jobs last month, and June's employment gain was revised higher. The rupee however pared some early losses and was recently trading at 63.68 against the dollar.

10 Things To Know About The Rupee's Surge This Year

1) The rupee's surge, in a way, comes a surprise. 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.

2) But the rupee changed course. It hit a two-year high of 63.58 against the dollar on Friday.

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

4) 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.

5) 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.

6) 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.

7) According to forex and treasury solutions company, IFA Global, rupee has support at 63.60 levels against the dollar while a move beyond 63.85-90 could increase selling pressure in the Indian currency.

8) Traders also say that the dollar/rupee pair moving below 64 suggests that the RBI is comfortable with a stronger rupee and largely refrained from intervening to cap broader gains in the domestic currency. However, industry body Assocham has said that the rupee's rise has hit the competitive edge of exporters.9) 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 last week amid US political woes.

10) Experts say that from hereon, the inflows and the broader dollar trend would determine the level of rupee this year. The US Federal Reserve's moves will also be closely watched. Strong US payroll numbers and signs of labour market tightness could lead to the Federal Reserve soon announce plan to start shrinking its massive bond portfolio, say experts. Economists expect the Fed will announce a plan to start reducing its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities at its next policy meeting in September.