Is the current strength of rupee sustainable?

The rupee has returned to the level of 78-79 per dollar from a record low of 80.06 per dollar at the end of July. Foreign investor exodus, weak crude oil prices and a break on the dollar have led to the reversal.

For example, the US dollar index has cooled to a level of 106 from its 20-year high of 108.5 last month.

The move comes as the US Fed downplayed fears of a recession and signaled a possible slowdown in rate hikes.

However, any decisive move in the currency is dependent on foreign inflows and the RBI’s rate growth trajectory, say analysts.

Dilip Parmar, Research Analyst, HDFC Securities, Dollar Inflows, Macro Data Key Monitorable. A good monsoon may make RBI less aggressive and crude oil prices have been supportive. But geopolitical challenges remain a major risk, he says.

Besides, analysts have flagged India’s tense external situation as yet another slowdown for the currency.

A Bank of Baroda note said, “The trade deficit remains at a record high, which will put pressure on the balance of payments.” The softening of global commodity prices may lead to a moderation in imports. However, exports will remain muted amid weak demand in key markets such as the US and Europe.

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

According to him, “The correction in rupee was driven by triggering of stop-losses as most of the market punt was long on the US dollar, and short covering of the same extended the move. The currency will likely exit the bottom and move from 79.5 to 80. will resume its upward journey towards the level.

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That said, analysts are of the view that any further relief in the rupee would be most beneficial to oil marketing companies, which could offset losses on marketing margins.

Traditionally preferred IT and pharma companies also continue to be the preferred bets given their strong hedge positions against currency volatility.

According to Gaurang Shah, Chief Investment Strategist, Geojit Financial Services, the markets generally look at IT, Pharma in the current scenario. The export opportunity makes specialties, agrochemicals etc a good bet.

Today, apart from corporate earnings, the outcome of the Bank of England’s interest rate policy will also be in the eyes of investors.

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