The rupee just clocked a seven-month high amid a surge in buying from foreign investors

• The Indian rupee rose by ₹0.57 yesterday to close at ₹68.53 against the US dollar - its highest level since early August 2018.
  
• This performance is largely due to a surge in foreign fund inflows and a narrowing of India’s trade deficit - the latter of which fell 22% to $9.6 billion in February.
  
• Foreign portfolio investors have invested over ₹220 billion in India’s stock markets since the beginning of March, reversing a run of foreign investment outflows.
  

The Indian rupee currently stands at at ₹68.52 against the US dollar - its highest level since early August 2018. It recorded a ₹0.57 gain yesterday to close at ₹68.53.

This caps a ₹1.61 rise for the rupee against the US dollar in the last six trading sessions. The stellar run is largely due to a surge in foreign fund inflows and a narrowing of India’s trade deficit - the latter of which fell 22% to $9.6 billion in February owing to a rise in exports and a reduction in petroleum and gold imports.

Foreign portfolio investors have invested over ₹220 billion in India’s stockmarkets since the beginning of March, reversing a long run of foreign investment outflows.

This is largely a result of a pause in rate increases by the US Federal Reserve, which has caused investors to reroute their money to markets where they can achieve a higher return, as well as the higher possibility of the Modi government’s re-election.

In the wake of the Pulwama attacks and ensuing airstrikes, there has been a groundswell of national fervour and support for the ruling administration.

In fact, most opinion polls point to a comfortable re-election for Modi. This portends policy stability and continuity - which will be a huge plus for foreign investors.

The rupee had a solid run in the last two months of 2018 - even recording its highest one-day gain since 2013 in mid-December.

However, this was largely driven by a decline in oil prices, which fell to yearly lows excess production by a number of countries like Saudi Arabia, the US and Russia and continued exports from Iran.

This time around, oil prices have been on an upswing since the start of the year.

RBI intervention

A stronger rupee, while beneficial for importers, does not bode well for exporters as it translates into lesser foreign-currency denominated returns.

The Reserve Bank of India (RBI) is implementing a currency-swap programme to prevent a sharp appreciation of the Indian rupee.

On March 26th, the central bank will conduct a dollar/rupee buy-sell-swap auction wherein it will buy dollars and sell rupees to the tune of $5 billion. This will also increase liquidity in markets and keep interest rates subdued as bond yields decline.



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