The Indian rupee could strengthen to 94.50 against the US dollar in the near term, supported by a softer dollar index and a pullback in crude oil prices, according to Anindya Banerjee, Head of Research – Currency, Commodity and Interest Rate Derivatives at Kotak Securities.
He added, “We are seeing some softness in the dollar index and a bit pullback in the oil prices. If that continues for the next two three days externally, we could see 94.50-94.20, because since April of this year, we have been oscillating between 94 and 97. This is the third part of a series of measures which RBI has taken this year, so that band gets tested on the downside.”
The Reserve Bank of India (RBI) has announced measures to curb speculative short-selling and excessive hedging in the foreign exchange market. Under the new rules, banks will have to maintain 20% of the hedged amount as free cash, increasing the cost of hedging.
The higher cost could push hedging expenses from around 3.5% to 5.1%, making it more expensive to take dollar positions. This is expected to discourage excessive dollar demand and help support the rupee.
The RBI’s latest steps to manage pressure on the rupee are also expected to push up bond yields and forward premiums. The measures include steps aimed at curbing speculative activity in the foreign exchange market and managing dollar demand.
Banerjee said the impact on yields would come from bond sales to absorb liquidity, along with the effect of the cash reserve ratio (CRR) and other measures. However, he does not expect the latest steps to have a lasting impact on bond yields.
Higher forward premiums could increase the cost of hedging currency exposure for importers, while making it more attractive for exporters to convert their dollar earnings into rupees.
The measures are largely aimed at current account transactions, particularly dollar demand from importers, rather than restricting capital hedging. Banerjee said the RBI appears to be favouring measures that encourage capital inflows instead of restricting outflows.
Despite the potential for a near-term recovery, the rupee’s direction will largely depend on crude oil prices, the dollar index and global bond yields.
Banerjee said the RBI’s measures should be viewed as short- to medium-term steps to manage the impact of the West Asian crisis, rather than as a long-term shift in currency policy.
“If from $102 oil comes to $90, then it has a positive impact, or it gets to $120,” he said, highlighting the importance of crude oil prices for the rupee and the bond market.
India’s oil import bill has risen following the increase in crude prices. Banerjee estimated the monthly bill at around $15 billion-$16 billion, increasing the pressure on the country’s foreign exchange market.
The RBI’s plan to provide dollars directly for oil purchases could help meet part of this demand. However, the scale of intervention required would depend on how long elevated oil prices persist.
For the entire discussion, watch the accompanying video
Rupee may strengthen to 94.50 against dollar in near term: Kotak Securities
Catch all the stock market live updates here
NOTE TO READERS
Disclaimer: The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.