Behind rupee's turnaround against US dollar

The general sentiment has turned positive with the rupee gaining for the fifth consecutive session against the US dollar to close the day at Rs 63.38.

There have been a number of positive developments - chances of a war in Syria have receded, while August data shows the trade deficit has reduced to $10.9 billion against $14.2 billion a year ago.

But the main reason for the upsurge of the rupee is that foreign institutional investor (FII) funds have begun flowing in again, especially into the Indian equity market. In the last four sessions up to September 10, FIIs bought Indian equity worth close to $800 million.

Thus from an all-time low of Rs 68.75 against the US dollar on August 28, the Indian rupee in the past eight sessions has gained close to eight per cent.

Apart from risk appetite growing in the West, sentiment towards India improved following the new Reserve Bank of India (RBI) governor Raghuram Rajan's remark about focusing on growth that had taken a backseat in the recent past with policymakers focusing more on curbing inflation. Rajan also ruled out any unpleasant surprises on policy. This has seen money flowing back into the Indian market and helping the rupee.

Meanwhile, speculators in the currency markets have also been nipped in the bud. On his very first day of assuming office Rajan announced new measures to attract dollars. He allowed banks to exchange dollar denominated FCNR(B) deposits for rupees and also raised the overseas borrowing limit for banks from 50 per cent of unimpaired tier-I capital to 100 per cent. In addition, the current swap agreement with Japan was enhanced from $15 billion to $50 billion.

Though experts believe that the rupee may have some more room for appreciation, they also suspect it may face resistance around the 63-mark. However if the inflow continues, particularly in equities, the rupee might even inch towards the 61-mark. Both equities and the currency were in oversold positions and the recent rally was nothing but a relief rally, they feel.

From here on there could be consolidation. This has already started happening in the equity market which slipped on profit taking after the Sensex touched 20,000 in intra-day trades. Slowly the focus will shift to earnings growth of Indian companies and inflation data.

One would like to believe that the positive measures taken by the RBI will bring in more dollar inflows. But there is a US Federal Reserve meeting on September 18 to discuss whether to begin tapering off quantitative easing. If easing begins, it would certainly hamper dollar inflows into the Indian markets.