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What triggered the rupee’s surge to 32-month high?

The rupee surged to a near three-year record on Friday as ov..

The rupee surged to a near three-year record on Friday as overseas investments flooded into India amid global dollar weakness. Expectations of a further rise in the rupee saw exporters selling dollars and speculators short-selling the American unit, fueling the trend, dealers said. Meanwhile, India's foreign exchange reserves have risen to a record.

The rupee gained 0.06 per cent to 63.37 per dollar at the close, a level it last touched on April 29, 2015, having strengthened to 63.32 during the day. The last time the rupee touched this intraday high was the same day in April 2015. Dealers said the Reserve Bank of India intervened through state-owned banks to buy dollars to cool off the rupee. The sharp appreciation is eroding the competitiveness of Indian exporters, dealers said. RBI could not be contacted immediately for comment.

"Global dollar weakness is weighing on the emerging market currencies including the rupee," said Anindya Banerjee, currency analyst at Kotak Securities. "The rising trend is likely to continue as the US economy is yet to show any sign of significant improvement.

Foreign portfolio investors have invested a net Rs 1,447 crore in domestic debt and equities so far in 2018, according to National Securities Depository Ltd data, extending 2017's buying spree. In the last calendar year, they bought more than Rs 2 lakh crore of domestic securities, the most since 2014. Overseas investors pumped Rs 581 crore into equities on Friday, according to provisional BSE data.

Inflows and valuation changes led to India's foreign exchange reserves rising to a new peak of $409.4 billion, with the Reserve Bank of India adding $4.45 billion to the kitty in the week ended December 29. While the central bank does not cite any reasons for changes in reserve levels, forex dealers said the weekly jump was largely due to changes in the valuation of reserves held in other global currencies such as the pound, euro and yen. Foreign currency assets, which captures the valuation changes, rose $4.424 billion in the week under review to $385.104 billion.

RBI may have to resume open market operations to ensure that its foreign exchange intervention does not fuel inflation, a key gauge for monetary policy decisions.

"Any regulatory intervention will only add to rupee liquidity if done through the spot market, which in turn may prompt the central bank to sell sovereign bonds through open market operations," Banerjee said.

RBI doesn't make public any preferred level for the rupee but is known to intervene in order to prevent volatility. Since the start of December, the local unit has strengthened more than a rupee or 1.7% against the dollar. The rupee rose 5.96% in 2017, the first year in which it has strengthened since 2010, when it appreciated by 3.91%, according to Bloomberg data. The rupee has appreciated 0.8% in the opening week of 2018.

Brent crude surged to a two-and-a-half-year high of $68.3 per barrel, raising concerns among countries like India, one of the biggest oil importing countries. The inflationary effects of this will put pressure on the central bank's monetary policy management.

"The dollar traditionally rises in December but it bucked the trend this time in 2017," said Keta Kurkute, senior vice president, United Financial Consultants. "Exporters are now rushing to cover their future receivables as they book forwards/futures contracts."

Speculators too are flocking back to the currency market to bet on the rupee's sudden rise, providing an opportunity for trading gains, dealers said.

While some traders have short-sold the greenback expecting the rupee to rise, exporters were seen selling dollars for the one-month futures contract. The dollar index, which measures the unit against six major currencies, has slid to 91.86 from 94.10 about three weeks ago.

"Clearly, the currency market volatility will rise in coming weeks amid a cocktail of global and domestic events," said a currency dealer at a large foreign bank who didn't want to be named. "With hedge funds coming back at the beginning of the year, overseas inflows to Indian equites or debt will add to the rupee's gain."

Emerging market currencies have mostly gained ahead of US crucial payroll numbers Friday night. A weak number could well puncture growing confidence in the world's biggest economy.

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