RUPEE MAY SURGE TO 63/$ IN A MONTH, HOPES OF FIRST SOVEREIGN RATING UPGRADE IN OVER 6 YEARS: ET POLL.

BY SAIKAT DAS, ET BUREAU | UPDATED: APR 11, 2017, 09.32 AM IST

MUMBAI: Industry must be prepared for a stronger rupee in the coming months as a cocktail of economic and political factors revive hopes of a sovereign rating upgrade for the first time in over six years, shows an ET poll of 15 leading forex traders and strategists.
Majority of participants in the poll believe the local currency could appreciate to 63 levels in the next one month or so before dropping to 65 levels by June. It may end the year at the same level though the scope for further appreciation cannot be ruled out. One brokerage said the currency could even touch 60 to a dollar in the coming months, buoyed by strong foreign fund flows and an improved economic climate.

I expect a possible rating upgrade in the third quarter of FY18 given the way macro parameters are panning out," said Ashish Vaidya, head of trading and ALM at DBS Bank. "With implementation of GST (goods and services tax) and hopefully a resolution of bank bad loans problem, a healthier and sustainable investable economic environment will likely evolve sooner. 

Along with other expected reforms, all this could culminate into a sovereign rating upgrade adding to overseas investment inflows. A bout of sustained inflows would push the rupee up this year." The rupee has gained about 4.30% against the dollar since February 7, a day before the Reserve Bank of India announced the shift in its stance from ‘accommodative’ to ‘neutral’ in its bi-monthly monetary policy.

A rising rupee means more per-unit dollar realisation. It is nearly up 5% in 2017. The rupee lost about half a per cent to the dollar to close at 64.56 on Monday amid suspected RBI intervention.

In the past month the dollar index, which measures the unit against six other major currencies, was little changed at 101.2 despite expectations the US currency will gain with Trump at the helm. But things have turned out differently. 
This year, foreign portfolio investors have pumped Rs 85,108 crore into debt and equities. In contrast, they net sold stocks worth Rs 23,079 crore in the whole of 2016, according to data from National Securities Depository Limited.

To encourage foreign funds, the FPI investment limit in central government securities has been raised to Rs 1.85 lakh crore from Rs 1.52 lakh crore. "As long as India offers relatively higher rates, FPIs will keep coming. RBI’s latest reverse repo increase has added to the buoyant sentiment among overseas investors," said MS Gopikrishnan, head of foreign exchange, rates and credit trading at Standard Chartered Bank. 

Bharatiya Janata Party’s impressive performance in the recent Assembly elections has strengthened the rupee, which has reported its best quarterly performance in nearly eight years.

The possibility of fast-paced reforms and greater investment in infrastructure have whetted investor appetite as they look for better yields amid political and financial stability. 

Franklin Templeton Investment alone bought Rs 16,000-18,000 crore of domestic bonds in the past three-four weeks. "The rupee will gain from US policies," said  Satyajit Kanjilal, founder of Forexserve, who forecasts the rupee touching 60 by the year end. 

But the rising rupee squeezed exporters’ earnings since they had left unhedged positions anticipating a slide in the local currency. Small to medium exporters are now seen selling dollars in the forward market with one to 12 month maturities to avoid receiving less rupees for their dollar earnings. 

The rise may prove beneficial in the short term for Nifty 50 companies at the aggregate level considering the sample’s negative exposure to foreign exchange movements. 

In addition, since just over a third of India Inc’s forex borrowings are hedged, a stronger rupee should be able to reduce debt servicing costs to an extent. 

This marks a dramatic turnaround in trader sentiment since November last year, when many expected the rupee to trade at 70 to the dollar at a time the global market was betting on the greenback gaining strength following Donald Trump’s victory. 

Global investors have been optimistic about India’s economic expansion and corporate earnings as it continues to gallop at more than 7%. India is expected to grow 7.4% this financial year compared with 6.7% a year ago, with risk evenly balanced, RBI said in its bi-monthly monetary policy. 

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