Money & Banking

Weekly Rupee view: INR might gain on dovish Fed

Akhil Nallamuthu BL Research Bureau | Updated on July 29, 2021

Despite FPI outflows, outlook remains positive due to dollar weakness and bearish crude price

The Federal Reserve completed its two-day meeting and announced its policy decision yesterday. While the Fed was not expected to announce a decisive timeline on tapering, some sort of signal was largely anticipated. However, there was no inkling of it whatsoever and the interest rates were kept untouched, as expected.

The US monetary authority sees the inflation as transitory and, though the jobs market has strengthened, that there is room for ‘substantial’ progress, thereby maintaining a dovish stance. So, asset purchasing is set to continue at the current pace and this weighed on the greenback. The dollar (USD) initially bounced as the Fed sounded positive on the economy but gave away the gains and declined as there were no signs of tapering. This is positive for the rupee (INR) and it is likely to post gains in the forthcoming sessions. The current year-to-date loss of about 1.65 per cent is likely to reduce.

FPIs cut down on investments in the first six months of 2021

On the other hand, the price of crude oil, an important factor where the rupee is concerned, is likely to stabilise at the current levels in the short term — that is, the Brent crude is now hovering at $75 a barrel and if, at all, it moves it will most likely head south as the OPEC countries gradually increase supply. So, in that sense, the rupee is placed comfortably. However, sell-off by foreign portfolio investors (FPIs) can keep a check on the upside.

India joins trend to use strategic crude reserves to offset high oil prices

Net investment by FPIs has been minus ₹5,269 crore so far this month, as per National Securities and Depository Limited (NSDL) data. Of this, equities have witnessed a net outflow of ₹8,682 crore. Unless the stock market, which is broadly directionless now, shows positive signs, the fund flow to equity can remain negative. However, the debt segment, including VRR (voluntary retention route), has seen net inflow of ₹3,537 crore. There has been a net outflow of ₹123 crore in the hybrid segment, which includes real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). On the whole, the net FPI flows is negative so far, and this can be a drag on the rupee.

Outlook

Supported by the dollar weakness and the bearish inclination in crude oil price, the rupee can be expected to gradually gain over the next week despite the recent FPI outflows. Technically, INR breached the hurdle at 74.40 after a period of consolidation. This has turned the outlook positive, and the rupee is likely to appreciate towards 74 in the short run. Above this, it can touch 73.60. But if the local currency weakens below 74.40, which is now a support, it can depreciate to 74.80.

Published on July 29, 2021

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