The rupee has gained about five per cent against the dollar in just four days because of strong foreign fund inflows ahead of tomorrow's government bond investment limit auction. Improved risk appetite for Indian assets after reassuring statements by policy makers has also played a key role.
Market participants are split on whether it would be a sustainable recovery. While some say the rally might not last as the rupee continues to remain vulnerable to external shocks, others are positive.
On Tuesday, the rupee closed at a seven-week high level of 54.37 a dollar, two per cent higher than the previous close.
"The appreciation reflects the change in sentiment after some reassuring statements from the government," said Parthasarthy Mukherjee, president, treasury and international banking, at Axis Bank. He was referring to the clarification that the government put out on General Anti-Avoidance Rules last week and the commitment by Prime Minister Manmohan Singh, who recently took over the finance ministry, that steps would be taken to revive the economy.
Also, interest in the increased foreign investment limit of government bonds to be auctioned by the Securities and Exchange Board of India tomorrow has contributed to the rupee's gains. The foreign institutional investment limit in government debt securities was increased from $15 billion to $20 billion to support the rupee.
"There have been some positive developments around the world. Crude oil, coal and other commodity prices are coming down. Even the euro zone is getting stabilised. And even on Tuesday, India is giving one of the best returns for FIIs in debt or equity. Money has to come back to India. I am hopeful that we will be at 50 levels very soon," said Prabal Banerjee, chief financial officer at Adani Power.
"There seems to be a reversal of sentiment in anticipation of reforms and a favourable investment climate. The PM is managing the finance ministry now. But, unless the government walks the talk, just by making noises it will only be a short-term correction. We need FDI inflows to start trickling back. If we make the right decisions, I see no reason why the rupee can't go back to the 46 levels we saw a year back," said Isaac George, group CFO, GVK Group.
Last week, the rupee had fallen to an all-time record low of 57.33 a dollar due to global risk-aversion. However, positive developments on both domestic as well as international fronts have helped the currency recoup five per cent from those levels so far.
There were fund inflows of about Rs 4,628 crore in Indian equity and debt from last Thursday to Monday, according to data from the markets regulator. The Bombay Stock Exchange said there were net fund inflows of Rs 589 crore in Indian equity markets on Tuesday.
Abheek Barua, chief economist at HDFC Bank, said, "The rupee was grossly oversold on low volumes above 55 levels. Hence, this kind of reversal was likely when the tide turned to the other side." He added the rupee may continue to see two-way movements for a couple of weeks before settling in the 53.50-54.50 a dollar band.
The dollar index that measures the currency against six major global currencies fell to 81.76 levels on Tuesday as against 81.87 levels a day ago. The dollar index had rallied up to 83 levels in the past month due to increased risk-aversion globally. "As of now, it is too early to say the dollar has reversed. We need to watch at least this week to come to a clear conclusion," said analysts at India Forex Advisors in a note to clients.
Ratings agency CRISIL said the rupee may climb back to 50 a dollar levels by the end of the current financial year, provided support came from certain factors. These include: an improvement in the current account deficit, higher foreign fund inflows and a better outlook on domestic growth and inflation. CRISIL said the rupee may settle around 55-57 a dollar in case none of the positive factors played out.