Rupee opens low by 15ps on the first day of New Year after appreciating to 62.04 yesterday.
Rupee appreciated in last two sessions after the Govt. cleared ordinance of Land Acquisition bill. There was also selling side pressure from banks that helped rupee to appreciate.
If Govt gets major bills passed in the next parliamentary session that is budget session then there are chances of high capital inflow in India and subsequently appreciation in rupee. For example, through FDI in insurance India can attract inflow of 20k crore. Because of odd land acquisition rules there are pending projects worth $300 billion. FDI in defense has already been increased from 29% to 49% and if it increases to 100% then we may see investment of more than $100b. If FDI in multi brand retail sector is allowed then also there are chances of heavy capital inflow as Indias retail market is worth of $500b and among the worlds top 5 retail markets.
If even a small porting of capital comes to India from the above mentioned amount then there are chances of better growth, stable and strong currency and no fiscal deficit. India trade balance and fiscal deficit have improved compare to last few years. Both deficits are now running under presumed levels.
In New Year the rupee may continue weak trend as dollar is gaining strength on improving economy. The $16.8 trillion U.S. economy posted quarterly growth of 5% in last quarter and India as $1.87 trillion grew by 5.3% that shows which economy is growing faster.
Expectation of interest rate hike by Fed is also triggering panic in the market. Rupee may cross 64 level in case Fed announces interest rate hike in upcoming meetings. We may also witness investment outflow as investors may prefer to invest in U.S. as safer place then emerging markets.
Dollar index which measures the performance of dollar against six major currencies stood at 89.950, having touched a high of 90.325 on Tuesday, its strongest level since April 2006.
Rupee has performed better than other emerging market currencies as inflation cool down and current account gap shrank. The rupee ended the year with 2.3% drop, but fared much better than a 12.6% loss in the previous year.
In last year, among major currencies, EUR fell by 12.24%, GBP by 5.94%, JPY by 13.85%, CAD by 9.28%, AUD by 8.53% and CHF by 11.85%. U.S. dollar may further strengthen this year and we may see weakness in major and emerging market currencies.