Rupee strength unsustainable; bet on chemicals, OMCs in near-term: Analysts

Whether the recent strength in the currency will sustain or not depends on the monetary policy trajectory of the Reserve Bank of India, foreign flows, and crude oil prices, experts said.

The rupee has firmly recovered over the last two weeks supported by weakening crude oil prices, and the recent halt in foreign investors' exodus from domestic markets.

The currency has also drawn support from the decline in the US dollar index, which has now cooled off to 106 levels from its 20-year high of 108.54 touched in July.

The weakness in the greenback followed expectations of slower rate hikes by the US Federal Reserve in the coming months, and the central bank downplaying recession fears.

On Tuesday, the rupee closed at 78.72/$, gaining the most since June 28, according to Bloomberg data. Though, the rupee fell again to 78.9/$ on Wednesday.

Whether the recent strength in the currency will sustain depends on the monetary policy trajectory of the Reserve Bank of India, foreign flows, and crude oil prices, experts said.  

According to Dilip Parmar, Research Analyst at HDFC Securities, the market is expected to price in lower rate hikes going ahead as ease in commodity prices will likely arrest domestic inflation.

“Macroeconomic data and dollar inflows are crucial for rupee’s likely trajectory. Besides, a good monsoon is likely to give room to the central bank to not be too hawkish. The only risk could be a geopolitical upheaval, which can prompt haven buying in the dollar,” said Parmar.

The analyst expects some consolidation in the rupee over the short-term, after which the currency may reach 77.50/$ and stabilise, thereafter.

In a recent note, Bank of Baroda economist Aditi Gupta said that the reversal in foreign outflows suggests an improvement in investor sentiment, which should support the rupee going forward, adding that India’s stressed external position remains a concern.

“Trade deficit continues to track at a record-high, which will put pressure on the balance of payments. Imports may see some moderation aided by softening global commodity prices. But, exports too will be muted amid a fall in demand in key markets such as the US and Europe,” she said.

The country’s trade deficit expanded to a record $31 billion in July as exports declined sequentially, and imports came largely muted. Merchandise exports fell to a five-month low at $35.2 billion in July, while imports eased sequentially to $66 billion.

On the other hand, Amit Pabari, Managing Director at CR Forex Advisors said that the pullback in the currency is unsustainable as it has majorly been driven by short-covering of the dollar due to the triggering of stop-losses. 

The rupee is unlikely to react to the RBI’s policy outcome on Friday given the central bank delivers the already discounted rate hike of 35 to 50 bps, he said.

Investment strategy

The recent respite from the depreciating currency raises prospects for companies in the oil sector, analysts say.

From the space, oil marketing companies will likely benefit the most as a strong rupee will significantly reduce the import bill, offsetting the losses taken on the marketing margins, said Parmar of HDFC Securities.

Besides, traditionally preferred IT and pharma companies will not be badly impacted by the strength in the rupee as the companies have largely hedged their positions against currency volatility, he said.

Gaurang Shah, Chief investment strategist at Geojit Financial Services said that speciality and agrochemical companies are key beneficiaries from an export opportunity perspective given the china plus one strategy.