A turnaround in macroeconomic fundamentals, particularly the sharp narrowing in the current account deficit, has also helped the rupee. India's CAD is likely to be below 2 per cent in 2013-14 from a record high 4.8 per cent in 2012-13. Analysts have also credited Reserve Bank Governor Raghuram Rajan for the sharp reversal in the rupee's fortunes. The rupee has gained 13 per cent since September 2013 when Dr Rajan took over as RBI Governor.
The rupee's rise is good for importers, who will now have to pay less for buying products from abroad. So, oil marketing companies such as Indian Oil Company, BPCL and HPCL stand to gain. Lower fuel prices will also lead to further easing in inflation. The appreciating rupee will also benefit students who want to study abroad and Indian travelers going overseas.
However, the rising rupee poses a big risk to exporters, who will now earn less, unless they hike prices of their products. It's not surprising that IT stocks have fallen 11 per cent in the last one month as compared to 6 per cent rise in the Sensex.
Most analysts believe that there's little headroom for the rupee from these levels.
1)Forex Dealers say RBI has been buying dollars intermittently over the last week to slow the rupee's rise and also to shore up its foreign exchange reserves.
2) Analysts say if rupee strengthens too much then imported items will start competing with domestic manufacturers and India's exports will become less competitive. The RBI is unlikely to allow that to happen.
3) The biggest reason for the rise in rupee is falling imports and rising exports.The best for India's trade balance may be over. Gold imports are lower due to restrictions and 'excluded' smuggled gold, capital goods imports are down reflecting low investment in the economy and exports have started to taper,because of rupee appreciation.
4) According to HSBC Global Research, the Indian currency tends to benefit into an election, but struggles to maintain such positive momentum after the event.
5) Bank of America Merrill Lynch says UPA, NDA and United Front have all allowed the RBI to buy forex to secure rupee stability in the past. It expects Dr Rajan to hold Rs. 60-65 per dollar levels if the USD settles at 1.30/per euro. This means that even if a stable government comes to power, as anticipated by markets, the rupee is unlikely to rise much from current levels. However, if a weak government assumes power post polls, the rupee may come under pressure as foreign investors may repatriate funds.