If well begun is half done, then the rupee may be on its way to recoup a lot of the ground it lost in the latter half of 2011. The Indian currency's fortunes seem to be rapidly turning for the better in 2012, with the past fortnight being the best for the currency in a long time now. Continuing the good start in the beginning of the calendar, the INR gained as much as 4.7 per cent against the US dollar in the last two weeks to close at 50.34 per USD. This is just a tad below the psychologically crucial level of 50, which was breached in early November. Against the euro too, the rupee gained strongly (3.7 per cent) to close at 64.99.

Improving economic indicators

The many steps taken by the RBI at the close of 2011 to support the beleaguered rupee seem to be showing results now. Also aiding the currency in recent weeks are positive tidings on the economic front. Food inflation has been negative for three consecutive weeks now, and headline inflation for December 2011 was at 7.47 per cent, a two-year low. The trend, if it continues, will give the Reserve Bank of India leeway to moderate rates in the months ahead. Also, latest industrial production data show a growth of 5.9 per cent in November 2011 compared with the fall of 5.1 per cent in October 2011. This, however, may be due to the ‘Diwali effect' and the numbers for subsequent months need to be watched.

Export growth in December (6.7 per cent) has also shown modest improvement after the poor show of 3.87 per cent growth in November. Imports, however, continue to grow faster than exports, causing the current account deficit to further widen. This could exert pressure on the rupee in the months ahead. The INR was also aided in the past fortnight by a buoyant stock market, which saw FII inflows of around $972 million. In the coming weeks, the movement in the rupee will be influenced by the RBI's stance in the credit policy coming Tuesday.

Euro gains

The euro, on a losing streak against the US dollar, lost some more in the previous fortnight before making a smart comeback. S&P's downgrade of the sovereign ratings of nine European nations, including France, and its follow-up downgrade of the Euro zone rescue fund saw the euro on slippery ground. There were also increased fears of a Greek debt default after talks with lenders reportedly hit a roadblock. However, news last week of the IMF considering a boost in its lending capacity and the Greece talks being back on track saw the euro rebound strongly. The euro currently yields 1.29 USD per unit, a gain of 1.7 per cent over the past fortnight. Consequently, the Dollex (an index of the US dollar against major currencies) shed 1.3 per cent over the last couple of weeks to close at 80.22.

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