Indian rupee likely to be sticky at 56-level per US dollar

The Indian rupee has depreciated by 4.66 per cent against the US dollar since the beginning of May to trade at around 56.24 to a dollar on May 29.

The trend in the rupee-dollar exchange rate is not an isolated one. It mimics the exchange rate trend of the US dollar against most major currencies in the world.

For instance, the dollar index, which is a measure of the value of US dollar against a basket of important currencies such as the Euro, has been appreciating recently.

On May 29, the dollar index was around 84, according to Bloomberg. Typically, an index number above 80 is considered good for the US dollar and reflects a flow of money into the greenback.

In India's case, a couple of additional factors seem to be at play.

In 2013, the inflow of foreign investment into India has been healthy. Despite the inflows, demand for dollars in May has been more than enough to offset it, and had resulted in the rupee's depreciation.

Data on some trends in the foreign exchange market comes with a lag, making it difficult to gauge the proximate causes.

In the current situation, market perception seems to be that there has been an unusually large demand for dollars from oil marketing companies that want to finalise supply contracts to take advantage of a weak trend in the price of crude.

In addition, companies which have redemptions coming up on their foreign exchange borrowings have been buying dollars. The confluence of unrelated events seems to have led to the recent slide in rupee.

At this stage it is difficult to say how much longer this phase will continue. Recent experience, however, has shown if the pressure on the demand for dollars eases, the rupee does not begin to appreciate immediately.

The exchange rate around Rs 56 is likely to prove sticky.