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BL Research Bureau
Backed by steady foreign inflows, the rupee has been gradually appreciating since the beginning of the current calendar year; the year-to-date (YTD) gain versus the dollar stands at 0.7 per cent and had the Reserve Bank of India (RBI) not diverted the incoming dollars into foreign reserves by buying those dollars and selling rupee, the gain could have been much higher.
The National Securities Depository Limited (NSDL) data shows that the net investments by Foreign Portfolio Investors (FPIs) for the year now stands at ₹34,295 crore. But noticeably, March has seen a net outflow so far, which calls for caution. Equities has remained the favourites for the FPIs as the net inflow now stands at ₹47,659 crore whereas debt segment has seen a net outflow of ₹18,678 crore. Inflows through voluntary retirement route and hybrid category stands at ₹5,210 crore and ₹106 crore, respectively.
Inflation uptick
The recent Consumer Price Index (CPI) and the Wholesale Price Index (WPI) data show a considerable uptick in inflation that was recorded in February. Government data shows that on a sequential basis, the CPI increased to 5.03 per cent compared to preceding month’s 4.06 per cent and the WPI shot up to 4.17 per cent as against the previous month’s 2.03 per cent. This was largely due to the increase in food inflation – the Consumer Food Price Index (CFPI) increased to 3.87 per cent in February compared to 1.96 per cent in January. While these data have not really disturbed the positivity in the domestic currency, inflation sustaining at higher levels can exert downward pressure on the rupee.
Dollar index
The dollar index – a measure of the dollar against a basket of six major currencies – which was in a strong downtrend last year has been showing signs of recovery since the beginning of 2021. That is, it has gained 2.1 per cent YTD. But despite this, the rupee has managed to stay positive. The Federal Open Market Committee (FOMC) of the US Federal Reserves (Fed) meets on Wednesday and their statement and the economic projections should be closely watched. While the benchmark interest rate is expected to remain unchanged, an increase in expected growth can be positive for the greenback, which could trigger a rally in the dollar index from the current level of about 91.90. This can weigh on all emerging market currencies and the rupee may not be an exception.
Going ahead
The outcome of the US Fed could well determine the direction of the USDINR currency pair in the near-term. Nevertheless, as it stands, the rupee can be expected to stay positive supported by foreign inflows and this argument is supported by the YTD performance of the rupee and the dollar index. Assuming no major deviations from the expectations by the US Fed, the rupee can be expected to remain positive and could touch 72.25 within a week from the current level of 72.55.
Note : Analysis of the rupee (INR) against the dollar (USD) that we used to provide on a daily basis will now be provided on a weekly basis for a better perspective on the expected INR-USD movement.
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