Has The Rupee Actually Strengthened?

Has the rupee strengthened against the Euro? No.
Has the rupee strengthened against the Pound? No.
Has the rupee strengthened against the other South Asian currencies? Maybe, by a percentage or two but this isn’t really a big feat because tomorrow it could be the other way round.
Yes, we have strengthened against the dollar but so, have other currencies.

The media reports lately have been abuzz with the stories of rupee performing exceptionally well against the dollar. The fact that remains neglected is that it’s the other way round. The rupee hasn’t been strengthening, it’s the dollar that has been weakening.

Pradeep Khanna, Head of Trading, Global Markets, HSBC India told BW Businessworld, “If you say that the rupee has been strengthening against the dollar, it will not be a comprehensive picture. One has to take into account the fact that it's the other way around, the dollar has been weakening. The dollar has weakened against almost all major currencies.”

Lack of delivery on promises made by President Donald Trump during the electoral campaign is cited as the major reason behind the weakening of the dollar. “There are quite a few reasons as to why the dollar has been weakening. One among them is that after the presidential election result last year in the United States, there was a feeling that there will be tax reforms, infrastructural growth, fiscal measures and potentially a bit of inflation and thereby, faster normalisation of monetary policy by the US Federal Reserves. However, so far these things haven't happened,” explained Khanna.

Euro’s bounce back is yet another reason for the strengthening of other currencies against the dollar. “As we know that a few years back the European economy was struggling. At that time, a lot of measures were taken like quantitative easing, negative interest rates and they were quite afraid of a deflationary scenario over there. Now, a couple of years, those measures have helped. The economy has become significantly better off which has been acknowledged by the ECB and they have expressed their intention to move towards normalising the policy from both perspectives: - one is rolling back of negative interest rates and beginning to reduce the quantitative easing. This has resulted in the strengthening of the Euro. Also, back in 2015 when Euro had really weakened a lot, at that time many other currencies weakened too as a consequence. It was like a cycle so, as Euro has regained, so has other currencies,” added Khanna.

 Reactions across sectors

It cannot be denied that the rupee gaining strength has brought some amount of cheer in the market. Kunwer Sachdev, Managing Director, Su-Kam told BW Businessworld, "A stronger rupee has positive implications for containing inflation as according to a RBI estimate, a five per cent rupee rise leads to a 0.10-0.15 per cent decline in the headline inflation.”

Explaining the impact of rupee going stronger, for the power sector, Sachdev added, “A stronger rupee implies that exports will get costlier and hence, it would be difficult to compete against cheaper Chinese imports. However, the situation seems to be neutralized with the GST move."

Ravish Kapoor, Director, Elan Group, told BW Businessworld, "The market has taken a positive turn with the Indian rupee recently reinforced to a fresh 24-month high against the US dollar, soon after Reserve Bank of India (RBI) has cut repo rate. The rupee has been appreciating because of strong capital inflows. These include portfolio inflows into equities, more importantly, debt markets. These are driven partly by global liquidity and partly by the improving fundamentals of the Indian economy."

Ssumit Berry, Managing Director, BDI group told BW Businessworld "The rupee has been on the rise this year with the currency appreciating 6.82 per cent against the dollar on a year-to- date-basis. The appreciation in the rupee has been steady, without much volatility; so far there seem to be few reasons to worry about rupee appreciation, which reflects the improved fundamentals of the Indian economy for all the sectors including the realty sector in the post RERA and GST era which will also help in improving the economic status of the country."

Atanu Mukherjee, President of M.N. Dastur & Co, a premier metals, mining, and energy consulting firm told BW Businessworld “The recent rupee strength is driven largely by liquidity inflows and to some degree on the expectation of improving economic fundamentals. An appreciating Rupee could negatively affect the competitiveness of exports in general but at the same time will help lower our import bill for commodities like crude, commodities and capital goods. The corporate dollar denominated debts will also be cheaper to serve in rupee terms due to the appreciation and should help the bottom line of firms. The net effect on trade will probably be neutral though.”

Thus, from the trade point of view, the impact of rupee strengthening against the dollar in overall will likely be neutral or relatively marginal because we aren’t the standout currency that has strengthened against the dollar.