Is the current strength of the rupee sustainable?

From a record low of 80.06 per dollar touched at the end of July, the rupiah recovered to 78-79 per dollar. The turnaround was facilitated by a brake on the exodus of foreign investors, the weakness of crude oil prices and the dollar.

For example, the US Dollar Index cooled to the 106 level from its 20-year high of 108.5 hit last month.

The move came as the US Fed downplayed recession fears and hinted at a likely slowdown in rate hikes.

However, any decisive move in the currency depends on foreign flows and the RBI’s rate hike trajectory, analysts said.

Dilip Parmar, Research Analyst, HDFC Securities, Dollar Inflows, Key Controllable Macro Data. A good monsoon could prompt the RBI to be less hawkish and crude oil prices have been supportive. But geopolitical challenges remain a major risk, he says.

Additionally, analysts point to India’s strained external position as another drag on the currency.

A Bank of Baroda note reads: “The trade deficit continues to be at an all-time high, which will put pressure on the balance of payments. Imports may moderate due to lower world commodity prices. But exports will be subdued due to weak demand in key markets like the United States and Europe.

Like-minded Amit Pabari of CR Forex Advisors expects the recent pullback to be unsustainable.

According to him, “The Rupee’s recovery was driven by the stop-loss trigger, as the majority of the market’s punt was long on the US Dollar, and its short cover compounded the move. The currency will likely bottom out and resume its advance towards the 79.5-80 levels.”

That said, analysts believe that any further rupee relief will be most beneficial to oil marketing companies, which may offset losses in marketing margins.

Traditionally favored IT and pharmaceutical companies also remain preferred bets given their heavily hedged positions against currency volatility.

According to Gaurang Shah, Chief Investment Strategist, Geojit Financial Services, markets are generally shifting towards IT and Pharmaceuticals in the current scenario. Export opportunities make specialty, agrochemicals, etc. good bets.

Today, in addition to corporate earnings, the outcome of the Bank of England’s interest rate policy will also be on investors’ radar.

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