Will the Rupee rise in May?

Last May after the US Federal Reserve first announced a likely roadmap for Quantitative Easing QE taper Morgan Stanley labelled India as a ldquofragile fiverdquo club member with other emerging economies such as Turkey South Africa Brazil and IndonesiaIn 2014 the Indian Rupee is outperforming Turkey South Africa Brazil and Indonesia picthinkstockEmerging markets were bound to be hit with the withdrawal of cheap liquidity from the system A rush of money back to the developed markets coupled with domestic fundamental challenges such as dwindling foreign exchange reserves and high inflation pushed the rupee to an all time low of 688 against the dollar in the next couple of monthsHistorically March has always been a good month for the rupee and together with the overall market optimism of a Narendra Modiled stable coalition government at the centre the rupee is displaying a close correlation with the Nifty once again To be fair credit must also be given to the UPA government as Indiarsquos macro outlook has improved considerably over the last year as a result of the fiscaltightening measures Well before the equity rally gathered steam the rupee outperformed the MSCI emerging market currency basket in January during the EM currency turmoilWith the Indian rupee close to the key psychological 60 level against the dollar one would expect the Reserve Bank of India RBI to be rebuilding reserves According to the Bank of America the central bank has bought 5 billion including maturity of FX swaps with oil companies since midMarch Indias import cover at sevenandahalf to eight months is well below the 10 months needed for INR stability which would justify further accumulation of reserves Indian equities have room for much further upside from current levels But the same cannot be said about the rupee In 2009 the INR did jump three per cent on the 2009 poll result Equities gained 18 per cent in two days post the result However here are two key differences In 2009 the INR had lagged recovery in EM currencies after the Lehman collapse as the FX market feared the event risk of the May 2009 elections In contrast in 2014 the INR is outperforming the Fragile Five peers Further in 2009 the RBI allowed the INR to appreciate as import cover was high In contrast again inadequate import cover will now force the RBI to buy FX if the emergence of a stable government attracts capital inflows according to a Bank of America reportMore importantly even on the back of the US Fed taper the dollar index is still trading below close to the 805 level Going forward the European Central Bank and the Bank of Japan are widely anticipated to add monetary stimulus as has been written in this column in previous weeks The yen and the euro are poised to weaken against the dollar We can see the euro at 13 and the USDJPY pair at 110 by year end The dollar index can rally to levels close to 8587 It is hard to see the rupee appreciating beyond 5758 levels over the next year RBI Governor Raghuram Rajan has cited a finance ministry report to suggest that at any level below 5758 to a dollar he would consider the rupee to be overvalued A ldquomarket friendlyrdquo result on May 16 can take the rupee to 57 against the dollar But one would have to be very brave to bet on further appreciationmdash IANS The views expressed are personal