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The rupee continued its strong run last fortnight. Rising convincingly above the crucial 50 level against the US dollar, the INR gained 3.4 per cent to close at 48.69. This is the rupee's highest level against the dollar since October 2011. Against the euro too, the rupee gained, albeit a lower 0.8 per cent, to 64.5. An increased appetite for risk which saw heavy FII inflow in the Indian equity market over the last two weeks aided the rupee's ascent.
In contrast, the movement away from dollar safety across many global markets saw the greenback lose quite a bit. The Dollar Index (an index of the US dollar against major global currencies) fell 1.6 per cent to close at 78.92, well below the important 80 level. Even the euro gained 1.8 per cent against the dollar and currently yields 1.31 per USD.
Risk-on mode
Indian equity markets have been on a tear since the beginning of the calendar, with the Sensex gaining around 2,150 points, close to 14 per cent rise. FIIs have been part of the party pouring in almost $3 billion so far in 2012. Positive news on the economic front including a moderation in inflation and improvement in growth metrics has contributed to the increased appetite for risk in the Indian markets. The past fortnight was no different with strong FII inflows ($1.6 billion) aiding an 866 point rise in the Sensex. The market was quick to lap up positive news such as the RBI infusing Rs 32,000 crore in the banking system by reducing the cash reserve ratio by 50 basis points, a strong showing in the Purchasing Managers' Index (a lead indicator of industrial activity), and food inflation continuing in the negative zone for the fourth consecutive week. On the other hand, negative news such as the Supreme Court cancelling 122 licences pertaining to the 2G scam was shrugged off. If the optimism persists and FII inflow continues, the rupee could strengthen further in the coming weeks.
Dollar weakness
The pledge by the US Federal Reserve to keep interest rates low at least till 2014 contributed to the weakness in the US dollar in the global currency markets. There are signs of improvement in the US economy and with risk aversion reducing, prospects of low interest rates on US Treasuries has led to receding demand for the asset.
Meanwhile, the euro registered good gains, aided by positive sentiments about the EU summit, which saw members agreeing towards stricter fiscal pacts to curb excessive spending.
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