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Rupee could hit 62

Rupee could hit 62.50-62 by March

Mon Aug 07 2017


Indian exporters should brace for a stronger rupee. In what may end up as one of the steepest rallies for the currency in recent years, the rupee may harden another 3 per cent or so by March 2018 after gaining about 6.5 per cent since January, aided by a robust economy and high real rates that continue to draw more overseas cash to the country.


About half of the 20 participants in an ET poll expect the rupee to rise to at least 62.50 by the end of FY18. About a fourth of them believe the rupee could hit a high of 62 or even less, while the most bullish bet on the local currency anticipates that it would harden another 9 per cent to 58 to a dollar -a level last recorded in June three years ago.


The local unit closed at a two-yearhigh of 63.58 a dollar on Friday, compared with 64.08 on Tuesday,a day before the central bank's bimonthly monetary policy that kept the policy stance unchanged at 'neutral'. The ET poll has also suggested a clear shift to bullish sentiment from bearish reflected earlier on the rupee.


"Prospects of a high real interest rate have led overseas investors to bet big on India," said State Bank of India chief economist Soumya Kanti Ghosh. "This helps the rupee's steady climb against the dollar. Rising unhedged positions for importers also add to market speculation that the rupee would appreciate further from the current level."


A rising rupee could hit exporters, while it may make borrowing in US dollars cheaper, with per unit repayment cost trending down in rupee terms.


Real rate is the nominal rate minus inflation. There are different ways of calculating the metric. It is now a little over 4 per cent going by the central bank's latest method of deriving it -the policy or repo rate minus retail inflation.


The real rate was just about 10 basis points, or 0.1 per cent, in January 2014 when the current cycle of easing in repo rates began. Repo rates have fallen about 2 percentage points since then, compared with more than a 6 percentage point decline in consumer inflation.


To be sure, the most bearish call assumes the currency will slide to 68 to a dollar by March, 2018, while some participants expect a fall to about 66.


"A combination of factors is triggering the rupee's rise," said gering the rupee's rise," said Ashish Vaidya, head of trading and ALM at DBS Bank. "A stable government, a surge in overseas inflows, supported by both foreign direct investment and foreign portfolio investors are helping, while a falling dollar index has added to the momentum."


Foreign direct investment, or FDI, inflows hit an all-time high of $60.1 billion in 2016-17. Foreign portfolio investors, or FPIs, have invested a net of Rs 1.75 lakh crore this calendar year in equities and debt, the highest since 2014.


"Also, the markets assume no threat from the US rate increase, with the Federal Reserve hinting at non-disruptive withdrawal of liquidity," Vaidya said. Fewer poll participants were willing to assign aggressive targets to the Nifty for the year end.


The most optimistic --10 per cent of participants -felt the Nifty would cross 12,000 by December, which is 19 per cent above the index's Friday closing price. A fifth of poll participants expect the Nifty to end the year between 10,800 and 11,000, which is a nearly 10 per cent upside, while 14 per cent said the index could close at 10,500 to 10,800.


"The Indian stock market is priced to perfection," said Nilesh Shah, CEO, Kotak Mutual Fund. "The upside is capped by valuations and geopolitical events while the downside is limited by liquidity, smooth implementation of GST and expectation of a better demand in the forthcoming festive season."


About two-thirds of participants said they do not expect a correction of more than 5 per cent in the near term. This is mainly because of uninterrupted purchases from domestic mutual funds, the equity schemes of which have been inundated with inflows from retail investors, who are continuously shifting investments from debt, real estate and gold to stocks, where the bull run will enter its fifth year in September.


Brokers said what was different in this rally compared with the previous one is the absence of a correction.


"Markets are overheated but reluctant to fall as uninterrupted flow of liquidity limits fall in every weak ness," said Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services.


Kotak's Shah said he does not expect a "major correction in near term except a few technical ones".


So far in 2017, the Sensex and Nifty have gained 23 per cent. While Reliance Industries has outperformed the markets so this year with 50 per cent returns, ICICI Bank and SBI have gained 29 per cent and 23 per cent, respectively.


Domestic mutual funds have invested nearly Rs 53,000 crore since January, while foreign portfolio investors (FPIs) have pumped Rs 58,000 crore into Indian stocks so far compared with Rs 38,000 crore in the similar period last year.


Foreign inflows slowed down in July but few overseas investors have been in a hurry to sell despite clear indications of the US Federal Reserve signaling that it intends to roll back its loose monetary policy. Higher interest rates in the US could lead to a stronger dollar, eroding foreign investors' share portfolio values in India.


What to buy


Poll participants are advising investors to stick to banks -especially private sector ones -automobiles, consumption, cement and metal themes. At the same time, the participants warn that sectors such as information technology and pharma may continue to underperform the market. Among mid-caps, RBL Bank, Exide Industries, Voltas, Graphite India and Ramco Cement are likely to be outperformers.



Technical Research
Saturday, December 01, 2018
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