The World Bank released its latest Global Economic Prospects report yesterday. According to the report, the growth in India’s gross domestic product (GDP) has been revised downwards to 8.3 per cent for FY21 from the April estimate of 10.1 per cent. Notably, it is 2.9 per cent higher in comparison with the January estimate. Although the report says that economic activity can benefit from policy supports like higher infrastructure spending, rural development, etc, the economy has been hampered by the second wave of Covid-19 and the lockdown restrictions that followed. This can weigh on the Indian rupee (INR), which is now one of the best performing Asian currencies. The year-to-date gain of INR against the dollar (USD) stands at quarter per cent as per Tuesday’s closing price of 72.89.

Also read: Consider buying crude oil futures

Crude conundrum

On Tuesday, the price of crude oil on the Nymex was comfortably above the $70-mark, and importantly, it is the highest close in two years. Also, on the domestic front, the futures price on the Multi Commodity Exchange (MCX) rose sharply in the evening session where the nearest expiry (June) closed at ₹5,089, sustaining well above the ₹5,000-mark. Since India imports crude for most of its consumption, a rise in price in the global market is a threat to the rupee. For the past two weeks, US has reported faster-than-expected depletion in crude oil inventories, and so, one needs to closely monitor subsequent data. If this trend continues, it can push the price upwards resulting in the INR facing the heat.

FPIs positive

The equity market performance since the beginning of June has been good which seems to have resulted in an increase in foreign portfolio investor (FPI) inflows into this segment, which has managed to attract a net inflow of ₹9,641 crore so far this month. However, the debt market witnessed a net outflow of ₹1,043 crore in the corresponding period. Nevertheless, the rupee will stand to benefit from strong net FPI inflows irrespective of the segment into which the money flows. Since the equity market looks bullish, the rally can be expected to continue, which can bring in more foreign inflows.

Technicals

Over the past week, the rupee has stayed flat, moving in a tight range against the dollar. It was largely held between 72.75 and 73.10 as indicated by the daily chart, and so, unless the exchange rate moves out of this range, the next leg of trend cannot be confirmed. Similarly, the dollar index has been trading in a sideways trend for the past three weeks, i.e., it has been fluctuating between 89.60 and 90.20. Even though the rupee and the dollar index are flat now, the former is trading near the one-year high of 72.26, and for the latter, 89.60 is a strong support. Therefore, the possibility of INR turning weak cannot be rejected even though the trend has been up for the past couple of months.

Outlook

While strong FPI inflows have been creating the demand for the domestic currency, the rise in crude oil prices can act as a drag. Technically, lately, the movements has been flat and until the exchange rate moves out of a range, the trend will remain unclear. These factors point to a sluggish period for the rupee, and for the next one week, the likelihood of the rupee remaining flat is high, though there could be moments of higher volatility induced by crude oil prices.

Related Topics
comment COMMENT NOW