The rupee has gained by over 4% since the last week of April this year, as foreign inflows surged to over $15 billion from March 21 to date. The glut of foreign exchange has led to the domestic currency gaining strength to 58.64 a dollar from the 61 levels on April 23.
"An appreciating rupee should bring down inflation ideally because landed cost of oil will go down and so will the subsidy burden of the government," said K Harihar, head treasury at FirstRand Bank.
While a few are bullish on the impact of appreciating rupee on current account deficit (CAD) – the difference between exports and imports that fell from $88 billion in fiscal 2013 to $45 billion in fiscal 2014 – others are conservative in their outlook.
"It all depends on the interplay of variables like inflows from non-resident Indians and foreign institutional investors and software exports being offset by increased oil and capital equipment imports on the back of a resurgent economy," Harihar said.
This could aid the easing of CAD and a possible shift back to savings from gold when returns turn positive.
"The appreciating rupee could witness a rise in oil imports because the political environment looks better" said Shubhada Rao, senior president and chief economist at YES Bank.
Fiscal 2014 oil imports in dollar terms were lower at $143.8 billion compared with the previous year's $144.3 billion, though tonnage-wise they were higher at 189.64 million tonne against 184.8 mt in fiscal 2013.
With the crude price averaging at a steady $108 a barrel, bankers and economists are of the view oil imports were more than likely to be higher in the immediate term.
Importers have been quite a satisfied lot since the rupee began appreciating in April on hopes that Bharatiya Janata Party will form the government. The rupee that hit a low of Rs 68.80 to the dollar on August 28 last year and stabilised after the new Reserve Bank of India governor, Raghuram Rajan introduced a slew of measures to attract non-resident deposits is now appreciating.
"I expect the rupee to trade around 58 to dollar, if the positive trend continues based on economic revival," said Moses Hardings, chief economist and group CEO at Srei Infrastructure Finance.
In order of priority, CAD can come down if growth is positive, inflation is tamed and fiscal deficit tapers from current levels, he said. Fiscal deficit for last fiscal was 4.6% of the GDP and is projected at 4.1% for the current fiscal.
It could remain static on account of dismal exports and IT-revenue linkages. However, bankers do not expect the rupee to sharply appreciate as the RBI would find ways to offset forex inflows.
"The last time when the rupee appreciated in 2007, the RBI sterilised the rupee and it could do the same if the currency rises again," Rao of YES Bank said.
In 2007, the RBI intervened in the spot market and sold forwards. It had also introduced market stabilising scheme where it mopped up excess dollar inflows in lieu of short tenor bonds.
For the moment, YES Bank and others are looking at 58 levels by December.
"The election-related uncertainty is behind us. FII inflows to the domestic market is likely to remain positive," Rao said.