Opinion

Tracing the dollar-rupee movement since the pandemic

Anil Kumar Bhansali | Updated on April 27, 2021

RBI, backed by its immense foreign exchange resources, tries to control the direction of the rupee though it always says it controls only the volatility

The dollar-rupee rate has shown a tendency to consolidate in a range for 6-12 months and then give a break out. Last year before the pandemic, it was consolidating between 69 and 71 broadly and as the pandemic broke out the pair also broke out and closed the financial year 2019-20 at 75.80.

As the pandemic cases rose the consequences of the pandemic also rose with the GDP in the first quarter of 2020-21 plummeting by 24 per cent. The rupee fell to a new all-time low of 76.91 on April 22, 2020 before the RBI supported it and started selling dollars to stabilise it. Meanwhile, the BSE Sensex had fallen to 25,000 levels and the NSE to 7,500 levels as the market gave a thought to the after-effects of the pandemic to the economy. At this juncture, Reliance started to sell stakes of Reliance Jio and Reliance Retail thus bringing in about $25 billion of FDI into the country.

Operation unlock

After a phased lockdown from March 18 to May 30, 2020, operation unlock was started in which the economy was opened in phases. Once the unlock phase started and the number of corona cases in the country started to fall, the economy returned to its growth phase in the third quarter of the financial year. The growth estimates for the next FY began to be revised and it was expected that in the first quarter of 2021-22 the economy is likely to grow at 24 per cent considering the base effect and an overall growth of 12 per cent in the financial year 2021-22.

The stock market started to rise as inflows from FPIs, FDI, corporate borrowing (due to low interest rates in the western economy), inflows from a string of IPOs and NRIs started to increase. The stock market levels nearly doubled in about nine months from the fall and Sensex crossed 50,000 and the Nifty, 15,000. The dollar was getting sold everywhere as Asian currencies rose with the CNY rising to 6.40 levels from seven against the dollar.

The rupee also rose based on the flows, but here the RBI was standing like a wall as it prevented any appreciation of the rupee beyond 72.25. The RBI bought nearly $121 billion from the market in a span of one year taking its forex reserves to a new high of $590 billion. The Sensex and Nifty started consolidating at these levels but individual stocks performed well especially in the chemical, IT and pharma industries as earnings growth was expected to be higher by about 15 per cent.

The earnings growth was above the estimates, but the PE rose to 38 against an average PE of 18-20. The inflows continued and allowed the dollar to touch a level of 72.25 thrice. Exporters rarely got a chance to sell at good levels as most of the time the inflows kept the rupee on an appreciated level.

RBI’s moves

As March 2021 approached, it was expected that the RBI would take the USD-INR higher (for paying higher dividend to the Central government), but till the expiry on March 26, 2021, the dollar was near to its low point and later on since the month, quarter and year were ending it was expected that selling would continue and keep the pair at its lowest.

However, the RBI proved everybody wrong and USD-INR closed the year near 73.10 after touching an intra-day high of 73.59. It was again proved that the RBI, backed by its immense foreign exchange resources, could ensure that it will always control the direction of the movement of rupee though it always says it controls the volatility.

Meanwhile, corona cases in the country started rising alarmingly and reached nearly a lakh cases daily in April. Various States started announcing lockdowns which also took the market by surprise and estimates for GDP by various rating agencies began to be revised again as the lockdown would surely affect the growth of the economy.

Though the the lockdowns were not as severe as in March-May it was estimated that it would slow the growth and the earnings of companies. The dollar started to rise as Asian currencies also started to fall against the dollar. The dollar index rose to 93.50 from a low of 90. It however fell to 92, but the fall in the index did not have any effect on the Asian currencies and the rupee. The dollar 10-year yields also had more than doubled from a low of 0.80 to above 1.77 before falling to 1.60-1.70 levels.

The RBI announced the Monetary Policy on April 7 and to keep the 10-year yields low (to keep the borrowing cost of the government low) the RBI announced a buy-back of G-Secs to the tune of ₹1 lakh crore, of which, ₹25,000 crore was scheduled on April 15. This was India’s QE and made availability of the rupee in abundance and took it lower against the dollar as the carry positions (borrowing against dollar at low ROI and placing the same in rupee at high ROI) to the tune of $45 billion started to unwind.

The rupee soon touched a level of 75.

From here, what?

Technically, once 75.20 is broken then we can see 76.90 in no time as 75.20 is 61.8 retracement of fall from 76.90 to 72.25. Further, beyond 76.90 the space is open for 80 levels. However, the RBI has accumulated the reserves for this eventuality and though they may not change the direction (as a weaker rupee is always an advantage to them) they will for sure keep a tab on the weakness of the rupee.

Generally, after stability, the rupee weakens to the tune of ₹7 which in the present set-up comes to around 80 (last time it weakened from 69.60 to 76.90).

Importers should buy during the dips and ensure they are hedged for two months. They should ensure they have sufficient margin on the costing front. Importers should buy Calls (OTM) or a sea gull. Exporters should keep a strict stop-loss of 74.75 and should keep upping their stop loss at every rise of 50 paise. Instead, of a stop-loss they can also buy an OTM (out of the money) put and ensure that they get the gains of the fall in the rupee.

In the past 30 years, post liberalisation USD-INR and equities have always shown a rising trend.

The writer is Head – Treasury, Finrex Treasury Advisors

Published on April 26, 2021

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