The gains have been more pronounced since February 8, the day the RBI in a surprise move decided to keep interest rate unchanged and also signalled a change in its policy stance from “accommodative” to “neutral” .
It has been a remarkable turnaround for the rupee. Just a few months ago, many analysts were predicting the rupee to slide to record low levels of 70 against the US dollar. Defying predictions, the Indian currency has hit its strongest level against the dollar in nearly 18 months amid strong foreign inflows into the country. The rupee hit a high of 64.88 on Thursday, extending its year-to-date gains to 4.7 per cent against the US dollar. The rupee’s gains have been more pronounced since February 8, the day the Reserve Bank of India in a surprise move decided to keep interest rate unchanged and also signalled a change in its policy stance from “accommodative” to “neutral” .
Here are 10 key things to know:
1) Anindya Banerjee, associate VP-currency and derivatives at Kotak Securities, says the RBI’s decision to hold interest rates in the February policy review has worked in favour of rupee. “Before the RBI meeting, the rupee was one of the weakest currencies in the emerging market basket. And after that rupee became one of the best performing currencies in the emerging market basket,” he said.
2) The RBI’s decision and its change in policy stance have helped real interest on rupee (interest rate adjusted for inflation) turn strongly positive, Mr Banerjee explained. The RBI played a substantial role to change the fortunes of the rupee, he added.
3) The Kotak analyst has a near-term target of 64.60 for the rupee against the dollar.
4) The BJP’s resounding victory in Uttar Pradesh elections has also triggered massive foreign inflows into Indian markets, which has taken domestic stock market to record highs.
5) Foreign investors have bought nearly $7 billion in Indian debt and equities (net) so far this month on hopes of an improving economy and optimism over Prime Minister Narendra Modi’s reform process after his victory in the key state of Uttar Pradesh.
6) Arvind Narayanan, head of sales, treasury and markets at DBS Bank, says the rupee is benefitting from confidence shown by international investors in India’s markets.
7) The rupee’s strong gains also signal that the Reserve Bank of India is comfortable with rupee at higher levels, said currency expert Jamal Mecklai. For a long period the rupee was kept in a tight range and it moved in a narrow range, he added.
8) Though the RBI does not say what level of rupee it is targeting, the central bank is known to intervene in the currency market to reduce volatility.
9) Anindya Banerjee of Kotak says fiscal year-end (March 31) dollar selling by exporters also contributed to the rupee’s rise.
10) The dollar has also fallen against a basket of global currencies. Earlier this week, the dollar had fallen to its lowest since November against a basket of currencies, as some investors turned skeptical over the Trump administration’s plans for fiscal spending boost. A Republican plan backed by US President Donald Trump to overhaul the US healthcare system was pulled on Friday after it failed to garner enough support to pass the Republican-controlled House of Representatives. Mr Mecklai said the key risks to the rupee’s rally remain global events like the elections in France and the Trump administration’s policies.