Limited room for further FPI investments in debt might put a brake on rupee rally, say experts
With foreign portfolio investors (FPI) infusing significant capital into the Indian debt and equity markets, the rupee has seen a considerable appreciation in recent times. The currency closed at 64.187 against the greenback on Monday— just 12 paise shy from a one-year high against the dollar. It ended 4 paise lower on bouts of month-end dollar demand from importers and corporates. Yield-hungry FPIs have already utilised all the available investment limits in Indian corporate debt. The latest depository data suggest that foreign investors have pumped in $17.25 billion into Indian debt since the beginning of this year while having infused $9.08 billion into equities.
As a result, FPIs now have limited room to pour more funds into Indian debt. All that is left is the state development loan (SDL) quota which has seen limited utilisation. “As a result, it is unlikely that we may see the rupee appreciate beyond the current levels,” said a currency expert. The rupee has provided one of the highest returns among Asian currencies this calendar year at 5.82%. Currency market experts are pointing out that the Reserve Bank of India (RBI) has been extremely active in defending the 64 level to the greenback. “Although we cannot definitely say that the central bank has a specific target, 64 seems to be the threshold beyond which any appreciation may not be preferred,” said a currency analyst.
The central bank has been using this opportunity to beef up its forex reserves which touched a record high of $391.33 billion as on July 21.The 10-year benchmark yield closed a basis point higher at 6.47% on Monday, compared with Friday’s close, as some players are believed to have pared their positions ahead of the declaration of the monetary policy on Wednesday.The market is widely expecting the central bank to cut the repo rate by 25 basis points, which according to many bond market experts has already been factored in in the prevailing yields.