Over the past week, the rupee (INR) has inched up against the dollar (USD). Consequently, it marked a one-month high of 72.27 yesterday before giving up some gains and ending the session at 72.43. Thus, the year-to-date gain of the domestic currency now stands at about 0.8 per cent and that makes the rupee the best performing Asian currency in 2021 so far. Other than the Indian rupee, all other major currencies in Asia have lost ground against the greenback.

FPI inflows

A major contribution to INR appreciation has come from strong foreign inflows into the Indian financial markets, especially equities. As of Tuesday, net investments by Foreign Portfolio Investors (FPIs) across all categories stood at ₹47,704 crore, according to the National Securities Depository Ltd (NSDL), an increase by about ₹13,400 crore over the past week.

Equity remains the preferred destination for FPIs as the net inflows into this category is at ₹60,344 crore. However, debt remains out of favour, with net outflows of ₹18,518 crore. Inflows through the voluntary retirement route and hybrid category stands at ₹5,797 crore and ₹82 crore, respectively. So long as the foreign inflows are robust, the likelihood of the rupee declining is low.

Crude price moderates

What is also helping the rupee is falling crude oil prices i.e., the price of Brent crude futures on the ICE has dropped after jumping above $70 a barrel a couple of weeks back; it now trading around $61. While the production cuts helped prices to head north, the extension of lockdown in several European countries could hit demand, weighing on the price of the energy commodity.

Since India heavily depends on imported crude oil, a drop in the international price of the commodity can cut down the crude bill. As long as prices remain lower, they can have a positive impact on the local currency as it potentially improves the current account balance.

Dollar index

The dollar index that ended last week with a minor gain has been moving up this week after a blip on Monday. The rising US treasury yields have been helping the dollar on the upside, even as the Fed maintained a dovish tone last week, the dollar does not seem to have lost traction. As yields rise, it can attract funds into dollar-denominated assets, which could further boost prospects for the greenback. A steady rise in the dollar can exert downward pressure on the rupee.

Outlook

While strong FPI inflows and softening crude oil prices are helping the rupee, one needs to keep a watch on the dollar because the dollar index signals that there is more upside left. Also, despite favourable conditions, the rupee failed to get past 72.25 twice in the last one month. In the days to come, there is a high chance for the rupee to stay flat i.e., to move in a range, possibly between 72.25 and 72.75.

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