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Is rupee getting stronger a good news?

G+ Profile |
Category:  Economic Market  
| 19-04-2017 12:11 PM

Indian Rupee

When the rupee is getting stronger, it shows the resilience of the Indian economy and its underlying strengths. The US dollar dropping to below Rs 65 from its life time high of about Rs 69 is a mixed bag of pain and pleasure. But, thankfully, the impact will be felt most by exporters and importers. However, the banking system provides adequate leverage by way of hedging and forward contracts. The rupee gaining strength did not come overnight and apart from the events in the U.S., the home ground has also contributed to what we are experiencing today.

IT industry could be worst affected

For IT companies the impact of the strengthening rupee could be more than others, particularly if contracts assumed higher realization from the US dollars. The bigger players are however expected to have anticipated the move well in advance. The smaller companies however, could take some hit if they had failed to factor in a stronger rupee when they finally get paid. Another area of concern would be the revenue guidance companies have projected, assuming the higher conversion available earlier.

For the import sector

India being one among the top importers of crude oil, the appreciating rupee is a boon. It will result in lower crude oil prices and therefore inflation will be contained.

To manage the uncertainty arising out of rupee volatility, once again, forward contracts and hedging are opted for, only by the bigger importers. There is always a cost attached to these and the smaller players often fail to look at the bigger picture. Hedging and forward contracts are similar to an insurance. You have the option to buy an insurance or go without it. But the risk is always on you and some people learn things the hard way.

What aids the rupee?

Strong FDI inflows consequent to weaker trends in emerging markets and a more promising spectrum in the Indian markets has been among the major reasons for the strengthening Indian rupee. Added to this, today, India enjoys a very healthy balance of payments situation and the current account deficit is hovering around the 1% mark.  Unless these elements change in the near in the near future, the rupee will gain more strength and by the end of 2017, it could well drift towards lower 60s to a US dollar.

Foreign Portfolio investments

As at April 2017, the Indian stock markets are poised to scale greater heights. In several decades we have a strong political system in place with no major threats. If the upcoming Monsoon season too is favourable, the stock market indices can climb further, creating lifetime highs. In comparison, other emerging markets are not enjoying similar luxuries. Obviously, therefore, foreign funds seeking growth will find its way into the Indian markets. More Foreign portfolio investments (FPI) will add further strength to the rupee helping it on its way towards the Rs 60 levels by the end of 2017.

Tapering demand for gold

On broader demands, India has seen a tapering demand for gold. In 2016, gold imports by India fell by as much as 44% registering the lowest net imports in 13 years. Import of gold translates to net outflow of foreign exchange while lower imports will aid further growth of foreign exchange reserves in the country.

Raghav Chandak Lead Financial Analyst

Over 7 years of experience with competencies in Financial Data Research & Modeling, Financial Product Development & Management and Financial data distribution.

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