Liquidity measures like G-SAP (G-sec acquisition programme) and the extension of TLTRO (Targeted Long Term Repo Operations) announced by the Reserve Bank of India last week ignited the bearish sentiment in the rupee (INR). As a result, the domestic currency slipped below the important base of 75 and is now trading around 75.20 versus the dollar (USD). The year-to-date loss stands at about 2.9 per cent.

Inflation tightens

Adding to the pressure on the rupee, inflation has seen an uptick in March. As per the government data, the Consumer Price Index (CPI) based inflation in March stood at 5.52 per cent. While it is lower compared to 5.91 per cent recorded in the same month last year, sequentially it has seen a rise as the inflation rate was 5.03 per cent in February. This is largely due to an increase in food inflation, i.e., the Consumer Food Price Index (CFPI) went up to 4.94 per cent in March as against 3.87 per cent a month ago. Inflation has tightened for two months in a row and if this trend continues; it can add more downward pressure on the rupee as the inflation differential between INR and USD will go up.

Muted FPI flows

Overall, the net flows by the foreign portfolio investors (FPI) over the past week were marginally negative. The net investments for the calendar year now stands at ₹53,404 crore versus ₹53,839 crore a week back, thereby showing a net outflow of ₹435 crore. While the debt market was popular among the FPIs in the past couple of weeks, equities seem to be making its way back as the net investments increased by about ₹1,000 crore to ₹54,394 crore. On the other hand, debt saw a net outflow of ₹1,163 crore and thus the net outflow for the year is now at ₹16,849 crore. Nevertheless, on a net basis, there was not much change and the impact of FPIs on the rupee was largely muted in last week. However, since the market is looking bearish of late, possible sell-off by the FPIs can result in the rupee taking a hit.

Crude oil up

The price of crude oil generally has a negative correlation with the rupee as it is one of the largest imported items into India. After a decline in March, the price of crude oil seems to be picking up steam, appreciating by a little over 8 per cent in April so far. The likelihood of further increase is high and if it happens, this can be another factor that can work against the local currency.

Outlook

The rupee has been weakening since the beginning of April and the prevailing scenario does not seem to help a recovery. Factors such as liquidity measures and upward looking crude oil prices in addition to a shaky equity market are headwinds. Thus, the rupee can be expected to stay below the key levels of 74.70 and 75. It might even extend the weakness and fall to 75.60 in the near-term.

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