The Indian rupee has pulled back from its record low of 68.80 against the dollar to just above 64 levels today.
The rally has helped boost all financial markets, with the benchmark equity index Sensex spurting more than 500 points. The Indian unit has risen more than 5 percent in the last four trading sessions.
Experts believe the rupee will continue its rise for some more days but will likely start its downward spiral once the US starts unwinding its accommodative policy.
Here are six reasons why the rupee rose to 64.2 today and will continue rising
1) China’s exports in August rose 7.2 percent, more than expected, indicating an improvement in demand for the country's goods in major markets. This is also an
evidence that the world's second-largest economy may have avoided a sharp slowdown. China is a major importer of Indian goods. The improvement in Chinese economy thus augurs well for Indian companies with interests there. This is a huge positive for India. In fact, this has boosted sentiment for all emerging market currencies.
2) US non-farm payrolls data for August came in lower than expected, thus giving rise to expectation that the US Federal Reserve may be prompted to at least decrease the quantum of its QE taper, limiting the foreign capital outflow from emerging markets including India. This is boosting the sentiment for the rupee, a currency which was the worst performing globally last month due to these fears.
3) Fears that the US may strike Syria have receded significantly after the West Asian nation responded positively to Russia’s proposal that it should put its chemical weapons under international control. The US has also said it could be a significant breakthrough for the imbroglio. The fears of a war in the West Asia had pushed the global crude oil prices higher, which is bad for India as the country meets 80 percent of its oil requirements through imports. An increasing import bill was the key reason for the country’s widening current account deficit. FIIs have pulled out their funds from India on fear that the high CAD will further weaken the country’s economy. Now with the concerns of a war waning and hopes rising that the government efforts at controlling the damage on its fiscal health may bear fruit, FIIs are likely to stay put.
4) The government has already announced a few measures to control the twin current account and fiscal deficits. Expectations are that with the Parliament session over, the government will muster more courage to announce a one-time increase in diesel prices, signalling its resolve to push ahead with reforms. This is also boosting the rupee.
5) Ever since Raghuram Rajan took over the RBI governorship, there is a buoyancy in the financial markets. Dealers expect a market friendly Rajan to announce more practical solutions for the currency crisis. A major upmove in the currency happened after the RBI announced the opening of the dollar swap window for oil marketing companies. The move helped the central bank to move away from the market demand for a good $500 million daily, thus easing the pressure on the rupee.
6) Analysts expect the currency to break 64 level and move towards 63 in the short term as buyers are likely to emerge at these levels.