Rupee continues to rise, many hope its only for a short term

Indian Rupee is appreciating like art during an economic downturn. 

The INR has hit a 21-month high of 63.93 per dollar. after moving past 65-mark in the beginning of April. 

Overall, Indian Rupee has appreciated 5.4% in the current fiscal year. 

A total of Rs 21,886 crore has been invested in Indian markets – among which debt market has seen inflows of Rs 19,469 crore and remaining Rs 2,417 crore pushed in equities market.

Analysts at Kotak Institutional Equities expect Rupee to remain strong for another one-two months led by foreign flows. 

Vinod Nair, Head Of Research at Geojit Financial Services said, "Risk will emerge if we continue to outperform other EMs in the long-term, whereas  this is an intermediary phenomenon led by strong FIIs inflow post the overwhelming state election result which will stabilize in the near-term."

Appreciation of the rupee is usually a negative trend for the  export driven businesses like IT services, automobile, textiles & garments, gems & jewelry and pharmaceuticals. On the other hand, the importers tend to benefit from appreciation of the Rupee against the Dollar.

Earlier, Care Ratings had said,  "Exports lose their shine as the competitive edge is lost. The rupee has already been one of the best performing currencies with the dollar holding on against the euro. In these conditions further appreciation will come in the way of growth in exports."

Not only this, as per Care, India's remittances will also be negatively impacted as they will deliver lower value when converted to rupees

Meanwhile Tarun Lakhotia Akshay Bhor analysts at Kotak Institutional Equities said that strengthening of Indian rupee is largely a negative for energy sector. 

The duo at Kotak said, "If INR appreciates further these companies will be impacted by lower oil and gas realizations for upstream, lower refining contribution for downstream, lower profitability across core business segments and lower contribution from LPG and petchem production segment."

"Downstream PSUs and Reliance Industries will benefit from one-time gain on a portion of foreign currency liabilities," added Kotak. 

On the other hand, a stronger rupee will be a positive factors for wholesale inflation. Care said, "A stronger rupee will result in lower crude oil prices for the Indian economy. This in turn is expected to reduce the Wholesale price inflation and will benefit aviation sector (importer of crude oil) besides other related products."

Siddharth Purohit Senior Equity Research Analysts – Banking of Angel Broking said, “We believe a strong rupee should result in lower crude oil prices for Indian basket and that should keep both CPI and WPI under check in the near term.”

For now, companies who are having foreign denominated debt will benefit from a stronger Rupee. 

In order to determine rupee, RBI will have to intervene in the foreign exchange market by purchasing more dollars. 

Care said, " The decision will be based on the judgment on what has caused the rupee to move up so fast. If it were just the fundamentals, then the probability of intervention will be minimal. However, if it is driven by speculative forces which have made the market volatile, there would be proactive measures invoked by the central bank."

"This however will result in injecting liquidity at a time when the markets are already facing the situation of excess liquidity. Therefore, RBI may have to use compensating tools such as Open markets operations, MSS bonds, cash management bills and variable reverse repo rate to absorb the excess liquidity. This will have to be done to stabilize bond yields, " Care said.