A good time to buy the dollar against the Indian rupee and hold

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    A good time to buy the dollar against the Indian rupee and hold
    The rupee almost a year back in August plunged to a record low of 68.86 against the dollar, as investors worried over India's high current account deficit.

    In almost a year, the rupee has recovered more than 12-13 per cent, thanks to an improving current account deficit and a stable government. At around the 60 levels investors trading the currency market in India could buy the dollar and hold for at least another six months to one year, which could provide them with some gains.

    In fact, there are a few things that could work for the dollar against the rupee. To begin with, it looks almost certain that at least by the end of the year, there could be an interest rate hikes in the US. When that happens, Foreign Funds (FIIs) would partially sell shares in India or foreign fund flows into the Indian markets could diminish significantly. All this could lead to a depreciation in the rupee vis-a-vis the dollar.

    In the next few months, the quantitative easing programme of the US Fed would also be complete, which means easy money and dollar inflows through foreign funds in India may slowdown or turn negative.

    Secondly, buying the dollar would provide a perfect hedge against shares, if you have invested in shares. For example, when shares fall, the rupee tends to weaken against the dollar and vice versa, thus allowing you some cushion against losses in shares.

    Thirdly, India has received robust dollar flows from FIIs, which has helped the rupee. It's extremely doubtful that the pace would continue and help sustain the rupee at the 60 levels. Also, the RBI might not want to intervene too much in the forex market to let the rupee appreciate against the dollar, as it could hurt exporters.

    Check currency rates here



    All in all, buying the dollar at the current levels of Rs 60 could provide some hedge against other asset classes, especially shares. All the good news for the rupee from economic recovery around the globe, steady government etc., has already been factored. Any risk to the global economy or geo-political tensions around the globe, would send the rupee into a tailspin against the dollar, thus enabling gains for those holding the dollar. Not a bad idea to buy the dollar at current levels.


    Read more about: dollar qe
    Story first published: Wednesday, July 30, 2014, 12:10 [IST]
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