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5 things to know about the rupee surge
Over the past few weeks, the Indian rupee is rising against the US dollar. Defying predictions, the rupee hit an 18-month high. It rose 4% in March 2017.
Here are five things you should know about the rupee rally:
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Why is it gaining: India witnessed $9.1bn net inflows in equity and debt markets during March 2017. To put things in perspective, inflows witnessed in the quarter to March 2017 in equity markets were higher than total inflows witnessed in preceding eight quarters to 2016. Investors pulled money out of India’s debt market after demonetisation. Soon after the UP election results, $4.1bn worth of Indian debt was bought by FIIs.
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Why the surprise: Brokerages had pegged the rupee value as low as 70 to a dollar for the year-end. Many perhaps did not anticipate the flood of foreign flows. Investment in the debt market is based on the difference in real interest rates between countries. Currently, our analyst says that the difference between India and US 2-year interest rates is 3.3%. This presents an arbitrage opportunity in the short-term. However, if US interest rates rise consistently, flows can reverse rapidly.
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What happens next: In the short term, the rupee is expected to appreciate. This is due to the fact that FII inflows continue to remain steady. At the same time, the RBI is unable to intervene to halt the rupee rally. This is because banks are flush with excess liquidity due to demonetisation. Any intervention in the forex market to check the rupee rally would result in more liquidity in the banking system.
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Benefits: A strong rupee boosts the confidence of foreign investors who wish to invest in the country. The country can see an increase in FIIs and FDIs in the near future. This will ensure that the Current Account Deficit (CAD) will remain under control. CAD is simply the money that India owes to the world. For a long time, India has been a major importer of goods and services. Due to this, it owed foreign exchange to many countries. But with an influx of foreign investments, the deficit will slowly decrease.
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Disadvantages of the rally: While there are a lot of benefits of the rupee appreciation, there are disadvantages too. For instance, exporters are hit hard by a rupee rally. In order to earn good profits, exporters need the rupee to be competitive and stable. A persistent rise in the rupee value can seriously impact their profits.
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4.1%
In the first quarter to March 2017, the rupee has appreciated 4.1%. India’s currency is not the only one to gain. The Mexican peso has surged 10% while the Korean Won is up 7%. During the month of March, foreign investors have bought as much as $9.1 billion dollars in debt and equities, according to the National Securities Depository Ltd data.
