Mumbai: The Indian rupee hit a 21-month high against the US dollar on Wednesday, buoyed by strong capital inflows into equities and debt instruments such as masala bonds. Experts are concerned that a stronger rupee could potentially hit local companies’ exports and earnings.
On Wednesday, the rupee hit a fresh high of 63.93 per dollar before paring some gains to close at 64.11, up 0.25% from its previous close.
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“Strong inflows into the debt market following NTPC’s Rs2,000 crore masala bond issuance was another reason for today’s rally,” said a currency dealer on condition of anonymity. “ This trend is likely to continue as masala bond issuances worth $1 billion are likely over the next 2 months.” Masala bonds are rupee-denominated bonds sold to overseas investors.
So far this year, the rupee has gained 5.5%, the most in Asia barring the South Korean won and the Taiwanese dollar, as foreign investors bought $14 billion of local equities and debt.
Typically, this level of appreciation should have seen the Reserve Bank of India intervening in the market. But excess liquidity in the money markets has made the central bank reluctant to buy dollars. Even the government seems to be willing to tolerate a stronger rupee.
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Nirmala Sitharaman, Union minister of state (independent charge) for commerce and industry, said earlier this month that while “the rupee getting stronger is a worry… the overall strength of the economy is now getting very adequately reflected, unlike the time when it was purely driven by exchange rates alone”.
Even so, analysts are concerned that a further appreciation of the Indian currency could hit corporate entities with unhedged positions.
“With nearly half of the EPS (earnings per share) of the companies that make up the Nifty linked to the global economy through exports, global subsidiaries or commodity prices, a further appreciation of the Indian rupee to a level of Rs62 per dollar could knock off 4% of earnings growth in FY18,” Edelweiss Securities Ltd said in an 18 April report.