Why has the rupee risen and where is it headed?

In addition to this, the dollar has been continuously weakening since the beginning of the year. The fall started after the US Federal Reserve decided to raise interest rates at its meet in December. Since then, the dollar index, which measures the strength of the greenback against a basket of six currencies, has declined by over 4 percent and is currently trading at 98.86.

In addition to this, recent developments across the globe have also weighed on the dollar index. For instance, France’s decision to conduct elections and the outcome of the first round of the election have boosted risk-on sentiment, leading to investors from developed economies investing heavily in emerging markets.

As a result, the dollar got sold heavily over the period under review by investors across numerous emerging market economies in order to buy into those markets. Consequently, the currencies of those respective countries have all appreciated vis-à-vis the dollar. Currencies of Russia, China, Korea, Indonesia, Thailand and Malaysia have all strengthened by 0.7 percent to 7.7 percent since the beginning of 2017.

So what kind of impact will a rising rupee have on our market? For one, exporters will have to bear the brunt of the falling USD-INR pair. Owners of small-scale export-driven businesses could very well shut down their businesses if the rupee keeps appreciating from here on.

“In this kind of a rally, there are bound to be some losers along the way,” said Anindya Banerjee, currency analyst at Kotak Securities. “Exporters will have to take stock again, adjust their revenue models and adapt to the rising currency whichever way they can.”

Also, a lot of India’s major companies have export-driven models, i.e. they get paid in dollars for their products or services. A rising rupee could hurt the earnings of such companies. According to a recent report by Edelweiss Financial Services, if the rupee hits 62, it would translate to an erosion of 4 percent of Nifty-listed companies’ earnings, since nearly 50 percent of Nifty companies’ earnings depends upon foreign exchange.

A sell-off in local equity markets could trigger a depreciation of the rupee, as could RBI changing its stance to ‘accommodative’ again and talking about faster rate cuts. “The former is difficult to predict and the latter is highly unlikely,” Banerjee told Moneycontrol. “Another possible reason for a depreciation of the rupee would be the government announcing plans to spend more than expected. But again, that is highly unlikely.”

Banerjee added that he expects the rupee to continue trading with a positive bias, at least for the next one month, and that this could be the beginning of a new rally that could push the rupee even higher against the dollar.

Market participants believe the rupee’s strength is nothing but a reflection of the stability and strength of the Indian economy at present. “Investors have been viewing the rupee as being very risk-friendly and the outcome of the Uttar Pradesh state election only strengthened that view,” said Suyash Choudhary, Head – Fixed Income at IDFC Mutual Fund. “Overall, given the macro-economic picture at the moment, I would expect the rupee to continue trading strong in the near term.”