The rupee has strengthened over 5 percent to the dollar since January, despite India’s trade deficit widening over the same period. It is currently trading at 64.51, after having touched a two-year high of 64.28. The last time the rupee appreciated sharply was back in 2006-2008, when it appreciated 11 percent.
Why has the rupee risen so much in just over three months?
Since January, foreign portfolio investors have invested a total of Rs 86,611 crore in Indian markets. Roughly half of this has been invested in equities and the other half went to the debt market. Ever since RBI changed its stance on liquidity to ‘neutral’ at its February policy meeting, bond yields have risen by around 40 basis points. This created an investment opportunity for a lot of FPIs who found the higher yields attractive.
Is India the only country that FPIs have invested in so heavily?
No. India is among a number of emerging markets that have seen a surge in FPI investment over the last few months. Russia, China, Korea, Indonesia, Thailand and Taiwan have all seen an appreciation of 0.8 percent to 9.2 percent in their respective currencies since the beginning of the calendar year.
Why are FPIs investing so much money in emerging markets?
Donald Trump’s appointment as President of the United States in November sparked a rally in US markets and other global markets. The rally was driven by expectations that the Trump government will spend more on infrastructure, borrow more from the market and boost economic activity in the US. Trump was also expected to reform trade policies with many trade partners. This led to increased foreign investment in most emerging markets across the globe.
Can the rupee rise further hereon?
It could, if foreign capital inflows remain strong. So far, the RBI has been unusually restrained in intervening in the forex market. Market participants feel at some stage it will. Most of them see the rupee remaining range-bound between 64.30 and 64.70 in the near term.
What would happen if the rupee rises further? Is it bad for our economy?If the rupee gains against the dollar materially from here on, it could negatively impact earnings of Indian companies that earn a big chunk of their revenues from exports. Also, it could make many of the smaller export-driven companies uncompetitive and even threaten their existence. The good part is that currencies of other major exporting nations too have appreciated.