Is the current strength in rupee sustainable?

From a record low of 80.06 per dollar touched in late July, the rupee has pulled back to 78-79 per dollar levels. The reversal has been aided by a brake on foreign investors’ exodus, weak crude prices and the dollar.

For instance, the US dollar index has cooled off to 106 level from its 20-year high of 108.5 touched 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 is dependent on foreign flows and the RBI’s rate hike trajectory, analysts say.

Dilip Parmar, Research Analyst, HDFC Securities, Dollar inflows, macro data key monitorables. Good monsoon may prod the RBI to be less hawkish and crude oil prices have been supportive. But geopolitical challenges remain a major risk, he says. 

Besides, analysts flag India’s strained external position as another dampener for the currency.

A note by Bank of Baroda says, ‘Trade deficit continues to be at a record high, which will put pressure on the balance of payments. Imports may moderate due to softening global commodity prices. But, exports will be muted amid weak demand in key markets like the US and Europe’ 

Sharing similar views, Amit Pabari, of CR Forex Advisors expects the recent pullback to be unsustainable.

According to him, “The recovery in rupee was driven due to triggering of stop-losses as the majority of the market’s punt was long on US dollar, and short covering of the same aggravated the move. The currency will likely bottom out and resume its upward journey towards 79.5 to 80 levels.”

That said, analysts believe that any further relief in the rupee will be most beneficial for oil marketing companies, which can offset the losses taken on the marketing margins.

Traditionally preferred IT and pharma companies also remain preferred bets given their strongly hedged positions against currency volatility.

According to Gaurang Shah, Chief Investment Strategist, Geojit Financial Services, markets generally look at IT, pharma in present scenario. Export opportunity makes speciality, agrochemicals etc good bets.

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