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The Indian rupee (INR) after hitting a low of 72.90 last week has recovered sharply to the current level of 73.70. The dollar (USD) looks flat as well and year-to-date the domestic unit is now down by about 0.85 per cent. The rupee did not react much to latest inflation data and trade numbers and thus, it is likely to stay put, at least in the near-term.
CPI and WPI diverge
While the Consumer Price Index (CPI) inflation eased in August, the Wholesale Price index (WPI) saw a marginal uptick, according to the data released by the government. The CPI inflation in August stood at 5.3 per cent compared to 6.69 per cent for the same month last year. Sequentially too it was lower compared to 5.59 per cent in July this year. But on the contrary, the WPI saw an uptick and was recorded at 11.39 per cent for August 2021 compared to a meagre 0.41 per cent in August 2020. Sequentially too it went up slightly from 11.16 per cent in July 2021. Nevertheless, the rupee can be more sensitive to CPI than WPI and it has seen a welcome decline. If this is a start of a declining trend in inflation, it can prove positive for the local currency.
Trade deficit up
Ministry of Commerce released India’s foreign trade data on Tuesday and it shows that the trade deficit has widened in August to $13.81 billion compared to $8.2 billion in the corresponding month last year. The import growth (51.7 per cent) outpacing the export growth (45.8 per cent) is the reason. This was largely due to considerable increase in gold and oil imports, which saw an increase of more than 80 per cent each. However, the rupee was up following the new but gave up the gains soon. Increasing deficit is bad for the rupee but on the other hand, it also means that the economic recovery is occurring at a good pace, which is sentimentally positive and may not impact rupee much.
Positive FPI flows
The foreign fund inflows is healthy so far this month and has been providing good cushion for the rupee. Both equity and debt segment has seen positive fund flows – net inflows to equity stands at ₹6,985 crore whereas the debt segment has seen net inflows of ₹4,267 crore. Overall, including hybrid segment and investments through VRR (voluntary retention route), the net inflows for the month currently stands at ₹11,136 crore. This trend is likely to continue as the equity markets are at elevated levels, which can help the rupee stay positive.
Outlook
Continuing foreign inflows can put an upward pressure on the rupee. But, on the chart, the rupee seem to be consolidating. In the short-term, the Indian currency is likely to stay within 73.40 and 73.85.
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