MUMBAI: The Indian rupee, which climbed 6% last year amid record fund flows from overseas, is set to appreciate further against the dollar this year, with traders expecting Foreign Direct Investments to accelerate after New Delhi eased ownership rules in industries as diverse and capital-intensive as retail, civil aviation, and realty.
"The relaxed rules will give an additional push to the rupee, which is likely to gain this year," said Anaindya Banerjee, currency analyst at Kotak Securities. "Although the rupee is underperforming other emerging markets at the beginning of this year, it is expected to gather strength after the budget. Rising FDI inflows will also cushion the local unit in case global risk-aversion triggers capital outflows from financial assets in the emerging markets."
The rupee gained 0.31% this year against the dollar, following the 6% gains in 2017. It surged to a three-year record on Jan 5 this year as a global dollar weakness prompted a surge in overseas funds into emerging-market equities and bonds.
Last year, overseas investors invested about Rs 2 lakh crore in domestic securities, the highest since 2014. This year, they have bought securities worth Rs 4,730 crore, show data from National Securities Depositories.
FDI flows are likely to accelerate as India's macro fundamentals show signs of improvement, a convincing reason for international companies to put cash into local fixed assets.
"We are advising our exporter clients to cover their receivables as the rupee is going to go up once FDI flows start pouring in," said Keta Kurkute, senior vice-president, United Financial Consultants. "It will not happen overnight, but through the year."
A weakening dollar index, too, adds to emerging-market currency gains. The dollar index, which measures the unit against six major currencies, slipped 143 points to 92.44 in the past one month. Some dealers expect at least a 2.5% rise in the rupee's value by December-end.
To be sure, global portfolio investment flows may not be as high this year as they were in 2017. Globally, central banks are now expected to shift from easy monetary policies, potentially restricting fund flows to emerging economies.
"The global liquidity scenario and surging crude prices could put pressure on emerging-market currencies," said Bhaskar Panda, senior VP, treasury, HDFC Bank. "Against that backdrop, FDI inflows could help match extra demand (for dollars). The local unit is likely to be in a range this year, with a positive bias."