The rupee returned the highest yield in Asia comes after six-year long years of losing streak.

The Indian rupee has outperformed its Asian peers this year. So far in 2017, the rupee has gained 6.11% against the US dollar joining the best performing emerging market currencies. In this spectacular performance, rupee returned the highest yield in Asia comes after six-year long years of losing streak. A year ago Indian rupee was trading around the levels of 68 a piece US dollar. Recently last week when Narendra Modi-led BJP won the state assembly elections in Gujarat and Himachal Pradesh, the rupee strengthened and was quoted 64 against US dollar. The foreign institutional investors have bought $7.71 billion and $22.83 billion in equity and debt, respectively.

Factors supporting rupee in 2017

1) The rupee jumped 1.3 percent over the last two months, with a major boost coming from mid-November’s rating upgrade for India by Moody’s Investors Service.

2) A resounding win for Modi in the nation’s most populous state Uttar Pradesh earlier this year and later in Gujarat and Himachal Pradesh had also triggered gains.

3) The Indian currency has also received significant support from RBI’s credible monetary policy and constant hawkish watch on inflation.

4) India’s GDP growth rebound to 6.3% in fiscal second quarter July-September from a three-year low in the first quarter also helped rupee to remain strong.

5) Strengthening forex reserves helped the rally to sustain. India’s foreign exchange (forex) reserves increased $488.2 million as on December 15.

RBI predicts that inflation is at a risk of rising. Hence, in 2018, RBI is not expected to slash interest rates to stimulate growth. Generally, higher interest rates mean a corresponding rise in the currency as they attract more inflows of foreign capital that are seeking to exploit higher returns. The pressure not to cut rates provide some support to the rupee. Global brokerage house Nomura predicts the rupee to reach at 63 to a dollar for the first half of 2018 and 63.50 in the second half. Nomura considers rupee to be undervalued by 7% at present and batting for its appreciation in the coming year.

However, a certain section of the market is expecting otherwise. “INR was very strong in 2017 driven by strong FDI flows, significant interest rate differentials and a suppressed Current Account Deficit. 2018 should be a year of moderate depreciation. The first quarter is usually strong so depreciation bias is likely from April 2018. Full year depreciation could be 2-4%,” says market expert Sandip Sabharwal.

On the technical analysis front Milan Vaishnav, CMT, MSTA, Consulting Technical Analyst at Gemstone Equity Research & Advisory Services expects the rupee to remain in the 63.60 to 66 range for 2018. “All through 2017, the zones of 63.60-63.75 have acted as a good base for Rupee against any appreciation. Taking a macro look at US Dollar Index, the zones of 92-92.70 are multi-year supports. Going into 2018, we do not see Rupee appreciating beyond 63.60-63.70 on the upside. However, there is some more technical room for depreciation. It will not be surprised if we see some 3% depreciation on the flip side. So broadly speaking, we see Rupee remaining in the 63.60 to 66 range for 2018,” he says.