By Anindya Banerjee
Over the past one month, Rupee has been an outperformer, thanks to the fall in oil prices, robust FPI flows and hopes of Indian bonds being included in the global bond indices. However, in spite of the net FPI flows being negative $22.2 billion YTD, Rupee has done quite better than its peers. The table below shows that inspite of FPIs pulling out over $22 billion from Indian stocks and bonds, Indian Rupee has ranked as 7th out of the 26 major currencies. One of the major reasons for this kind of performance is massive intervention from the central bank.
RBI targets two aspects of Rupee:
(i) Volatility should be low
(ii) Indian Rupee should not become an outlier
RBI achieves these objectives by buying USD, when the US Dollar is weaker and selling them, when they are stronger. They have amassed a massive number of reserves and also their interventions via onshore and offshore derivatives makes their intervention quite effective. Macro-economic story remains strong for India and inspite of global economic slowdown and recession in large parts of Europe and also in China, Indian economy should continue to clock growth closer to 7% GDP for FY23. Unlike the inflation problems in several EM and DM economies, in India, inflation has not become a problem. Political stability and attractiveness of the Indian economy as an investment destination for foreigners can continue to drive structural flows into the country via FDI and ECB.
Indian Rupee is an interplay of twin factors: domestic and global. Even though the domestic picture appears strong, the global economic situation remains challenging. Europe and China are facing very difficult economic prospects. Global trade can suffer and that in turn can hamper flows into the emerging markets. Unlike Europe and China, the US economy has been resilient and due to that, the US central bank has one of the most hawkish central banks.
High cost of capital in the US Dollar and tightening USD liquidity is bad news for the flows in the emerging markets. When flows slow down in EMs, emerging market currencies tend to depreciate against the US Dollar. In such a situation, Rupee may face more depreciation pressures against the USD, in spite of the pace of depreciation being slower than most of its peers.
Price action remains decisively bullish on USD INR. As long as prices are not breaking down below 78.50 on spot, the bullish theme is intact. We could see prices test 80.50 and even 81.00 levels over the medium term.
(Anindya Banerjee, VP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities Ltd. Views expressed are the author’s own.)