India's wholesale prices-based inflation rate fell to 4.7% in May — the lowest in more than three years — triggering demand for an interest rate cut by the Reserve Bank of India (RBI) amid expectations that a normal monsoon and bountiful harvest will further cool prices.
A day after crashing to a new low of 59.99, the rupee recovered some lost ground, ending Friday at 59.27, a gain of 30 paise over Thursday's closing price of 59.57.
The BSE Sensex also recovered 55 points or 0.29% on Friday, after crashing 526 points a day earlier, to close at 18.774.24 after a volatile day of trading. The Nifty, too, gained 0.21% to close at 5,667.65. Experts said this is a good time to buy stocks.
The rupee's recovery followed hefty corporate inflows of dollars and RBI intervention. Finance minister P Chidambaram's statement that there was no need to panic also calmed the market.
The Indian currency, which has crashed more than 9% against the dollar since the beginning of May, is expected to trade in the 59-60 range over the next three months. According to trends emerging from the NSE and MCX futures markets, it may hit 60.21-60.24 in September.
"But we see the rupee heading to 55 by the year-end," said Taimur Baig, chief economist, Deutsche Bank India.
Analysts said investors with a long-term investment horizon could look at investing in companies with large export earnings and avoid those that were overly dependent on imported inputs and/or had large import bills.
"The IT sector will be an interesting bet now," said Nitin Jain, head, retail capital markets, Edelweiss Financial Services, a leading investment firm. He is positive on TCS, Infosys and Wipro. "Avoid companies that are sitting on a large amount of debt, such as those in the realty and infra sectors," he said.
"We are focused on export-oriented companies and sectors like oil and power," said Sachin Shah, fund manager, Emkay Investment Managers, another leading investment company.
Shah felt technology stocks, power utilities and healthcare companies would do well, subject, of course, to due diligence into their individual performances. The sectors to avoid: financial services, metals, and capital goods.
"Any positive action from the government on reforms could boost investors' confidence and help reduce volatility," said Sandeep Gupta, senior vice president, Motilal Oswal Securities.
Meanwhile, international ratings agency Moody's told Reuters on Friday that the rupee's weakness reflects macro-economic challenges "which do affect the country's credit profile".