Rupee won't fall beyond 65 per dollar in near term

Considering the data of G7 currencies of the last three months, they have appreciated on an average of 3% against the rupee. While on the other hand, almost half of the emerging market currencies have appreciated on an average of 4% (eg.: CZK, MXN, ZAR, MYR) while the other half have depreciated by around 3.3% (mainly KRW, BRL, RUB) against the rupee. This represents the fact that the Reserve Bank of India (RBI) seems to be persistent on keeping the rupee stable with active intervention.

RBI's vigilance is not allowing the rupee to bite much flesh out of the dollar. The same can be depicted from the continuous rise in forex (FX) reserves as RBI has reported to be mopping up dollar reserves, utilising the suitable market conditions. The FX reserves rose $4 billion to a record high of $386.5 billion for the week ended June 30, 2017. Over a four year period since 2013, India has added $100 billion to its reserves, giving considerable comfort to the central bank in defending the rupee, should it need to.

Till July 11, 2017, foreign portfolio investors (FPI's) have poured a record $15.86 billion into Indian debt so far this calendar year. This is the highest amount of net inflows into Indian debt on year-to-date basis while equities have attracted about $8.5 billion.

Domestic inflation has remained well below RBI's comfort zone, distribution of monsoon is expected to be normal and rollout of the goods and services tax (GST) has been taken positively. CPI inflation came in at a low of 1.5% in June vs 2.2% last month. Core inflation has also shown decline from 4.25% to 4.03%. This provides room to RBI for a rate cut in the coming policies. But one cannot ignore the fact that base effect has played a major role in the current declining trend. The government is also considering relaxing foreign direct investment (FDI) norms in sectors like construction, retail and also looking forward to ease rules in many sectors. This, in turn, will attract more FDI which may create jobs and also improve the country's balance of payment situation leading to rupee appreciation in long term.

Initially, divergence in monetary policy approaches had significant impact on asset markets. Now, the current phase could be marked by re-convergence of monetary policies of major central banks. Central banks like US Federal Reserve (Fed) has already stopped stimulating the economy in line with Bank of England and Swiss National Bank. The ECB is now ready to jump ship as it is expected to taper purchases of bonds and Bank of Japan has already tapered its purchases due to its yield curve control policy. Bank of Canada has already started with monetary tightening by raising rates. No matter what policy one pursues, there will be powerful winners and losers.

Taking all the external and domestic factors into consideration, I expect USD/INR to continue to spend some more time in 63.90 to 65.00 range.

The writer is country head - global markets group, IndusInd Bank