The rupee (INR), which was flat for most part of the last week, was dragged down in the last two trading sessions against the dollar (USD). Thus, the currency pair USD-INR has moved out of the range of 72.25 and 72.75, within which it has been trading for the past couple of weeks. On Tuesday, the domestic currency closed at 73.38 and thus, the year-to-date return is now at minus 0.4 per cent. Though the return has slipped into the negative territory, the rupee remains one of the best performing currencies in Asia.

FPIs eyeing debt

The net foreign inflows into the domestic market increased over the past week, though at a slower pace compared to the week before, i.e., the net investments by the foreign portfolio investors (FPIs) increased by ₹1,533 crore compared to an increase of ₹13,500 in the preceding week. Therefore, the net inflows for the year 2021 now stands at ₹49,237 crore.

Nevertheless, a change in anatomy of inflows can be observed, i.e., equities which remained the favourites for the foreign portfolio investors (FPIs) took a back seat last week and debt market inflows looked better. The equity segment saw a net outflow of ₹4,132 crore over the past week and thus, the inflows for the year is now at ₹56,212 crore whereas the debt market saw a net inflow of ₹3,104 crore and so, the net outflow for the year has come down to ₹15,414 crore. Thus, the interest seems to be shifting towards debt although it should be seen whether this trend continues.

Dollar rises

The dollar extended its bulls run in the past week as well. The greenback was aided by the US treasury yields, which saw a minor decline recently, has resumed its upward move. Consequently, the dollar index – a measure of the dollar against the basket of six major currencies – rallied past the important level of 93 on Tuesday. Moreover, concerns surrounding the third wave of coronavirus seems to help the dollar because of its safe haven tag. The movement of the dollar index hints that the dollar is set to appreciate further and this can weigh on the Indian currency at least in the near-term.

Outlook

Even though the FPI inflows increased, a reduction in pace and the appreciating dollar did not bode well for the rupee and thus it lost ground against the greenback in the past week, specifically in the last two days. As things stand, the dollar is likely to put more downward pressure on the rupee. Also, the rupee has faced sell-off after struggling to move past the important level of 72.25, which is seen as a favourable condition for rupee sellers. Hence, going ahead, the rupee is likely to depreciate to 74 in the upcoming week.