The rupee it rebounded to a high of 59.21 before settling at 59.39, a rise of 80 paise, or 1.33%. This is rupee’s biggest single-day gain since 21 September 2012, when it had gained 93 paise, or 1.71%
In line with the surge in stocks, the rupee today rose by a staggering 80 paise, its biggest single-day gain in last nine months, to close above the 60-mark at 59.39 amid signs of strong fund inflows on hopes that US Fed will not begin tapering monetary stimulus soon.
Forex dealers said sustained dollar selling by exporters tracking weakness in the US currency overseas also boosted the rupee.
The rupee commenced at 59.95 a dollar as against previous close of 60.19 at the Interbank Foreign Exchange (Forex) market and immediately touched a low of 60.02.
Later, it rebounded sharply and rallied to a high of 59.21 before settling at 59.39, revealing a rise of 80 paise, or 1.33%. This is rupee’s biggest single-day gain since 21 September 2012, when it had gained 93 paise, or 1.71%.
“Pulling back of the rupee today was mainly driven by sentiment after the announcement of gas price hike and formation of a coal regulator among others by the government.
“Also, the market’s expectation of improved scenario on CAD front on the back of falling gold prices and lesser buying of the yellow metal supported the currency,” said Hemal Doshi, currency strategist at Geojit Comtrade.
He also said rupee may pull back more from the current level if the RBI and government come up with more measures.
Foreign institutional investors pumped in a massive Rs1,124.31 crore into domestic equities today, according to BSE provisional data.
The BSE benchmark Sensex today zoomed by 520 points, or 2.75%, to end at 19,395.81 on a rally at the refinery counters.
The dollar index was down by 0.05% against other major rivals as three US Federal Reserve officials yesterday indicated investors had overreacted to recent remarks by Fed Chairman Ben Bernanke signalling tapering of bond purchases.
Meanwhile, premium for forward dollar remained weak on sustained receipts by exporters.
The benchmark six-month forward dollar premium payable in November declined to 143-145 paise from Thursday's close of 147-149 paise. Far-forward contracts maturing in May also dropped to 312-314 paise from 318-320 paise.
Nomura’s latest forex report on India says that the rupee is likely to remain weak, with very few tools available at the disposal of the RBI
Nomura estimates that despite net portfolio outflows of $6.7 bilion, largely from debt over the last month, foreign positioning in India in equity remains high. In fact, foreign equity ownership actually rose about 0.4% in June.
While it is commonly perceived that the recent depreciation of the rupee by about 9% against the dollar has brought it closer to its fair value, Nomura’s analysis shows that it is still overvalued by about 17.6%. Higher import prices from the rupee’s weakness are likely to keep the Reserve Bank of India (RBI) on hold for some time, lowering growth expectations and limiting foreign equity flows.
The fact that the rupee has breached the 60-mark could elicit a government response soon. Without solid reform, Nomura expects the rupee to remain weak. One suggestion it offers that can be implemented quickly and lead to a sharp halt in the rupee depreciation is an announcement of a large NRI bond issuance.
Nomura expects India's current account deficit to ease out to 4.3% of GDP in 2014 from 5% in 2013 due to lower gold imports, maintaining, however, that financing the deficit is going to be an immense challenge. The steadily worsening external vulnerability indicators suggest that the RBI has little agency to exercise. Aggressive intervention would only increase the vulnerability of further capital outflows.
The brokerage suggests real sector reforms such as clarity on gas pricing policy, raising FDI limits in certain sectors and relaxing external commercial borrowing limits further.
Nomura's expectations for the next few months are bleak, with a weak currency increasing imported cost inflation and hurting the corporate sector with un-hedged loans.
Domestic supply-side constraints, weak global demand and inelastic imports make it unlikely that even a weak currency could substantially help the trade deficit. Financial stability is likely to be of primary concern to the RBI, with a possible delay in rate cuts and tighter liquidity further hurting the prospects of domestic growth.