Surprise! Rupee rises from lows; now, know the reason why

Reserve Bank of India (RBI) on Tuesday intervened in the forex market to cap the falling rupee, which helped the currency recover from a 15-month low to close five paise higher at Rs 67.08 to the dollar. However, currency experts said it was a temporary relief as rising crude prices, dollar and interest rates in the US will continue to put pressure on the Indian currency.

With a forex reserves of $422 billion, RBI has enough of firepower to protect the rupee, but if the dollar index appreciates on the back on improved economic performance in the US, there is little it can do to protect the rupee. The central bank needs to be supported by a stable political climate, experts said.

"Right now, RBI has no choice but to sell as there is a huge short position on the dollar and long position in the non-deliverable forward (NDF) market in London or Dubai," said a forex dealer.

Venkat Nageswar, deputy managing director, global markets, at State Bank of India, said, "The markets are waiting to hear US President Donald Trump's statement or rather a tweet on US sanctions on Iran now. With unemployment levels improving, the inflation at 2% and the US Federal Open Market Committee (FOMC) is likely to raise rates by twice or possibly three times during the year the pressure on the rupee is likely to stay."

With higher interest rates expected in the US, the Treasury yields which are at 2.97% may attract investors away from emerging markets putting pressure on the Indian currency.

Watch this Zee Business video here:

The lack of buyer credit after the cancellation of Letter of Understanding (LoUs) is postponing cash flows in the forex market. But currency experts said this is only a small worry. The bigger one is the US expected sanctions on Iran and the performance of the dollar index.

The dollar index stood at 92.609, which was its firmest level since late December. The dollar gained broadly, maintaining its strength after Friday's mixed US data when the jobs added was lesser than expected. The US economy added fewer jobs than expected in April. While economists were expecting 192,000 payroll additions, they came in at 164,000. But currency experts said this is only a blip; the larger picture is a strong growth in the US economy.

Anindya Banerjee, currency analyst at Kotak Securities, said, "Rarely we do we see a confluence of factors like rising oil prices, dollar and interest rates in the US and political uncertainty in India led by various state elections putting pressure on the rupee. RBI has enough of forex reserves to protect the rupee, but the political climate in the country also needs to be stable. Besides, it cannot let the NDF front-run the exchange rate."

Political uncertainty, specially in the state elections, is making foreign portfolio investors anxious, resulting in outflows from the debt market. Domestic and external factors need to converge to protect the rupee, experts said.

By Manju AB, DNA India