The rupee stood as one of the better-performing currencies amongst emerging market peers, with its expected volatility also declining to multi-decade lows in June. Currency’s volatility is an important consideration when investors look to profit off the interest rate differentials between two currencies.
The rupee remained constricted within the 81-83 band on aggressive RBI intervention, irrespective of the dollar’s performance through the past month.
“RBI’s continued two-way intervention is also evident from the sharp decline in FX (foreign exchange) volatility,” said Rajani Sinha, Chief Economist, and Sonali Vahadane, Senior Economist, CARE Ratings.
Growth prospects
The positive bias for the rupee can also be attributed to improved growth prospects, healthy capital inflows, and lower oil prices, they added.
Amit Pabari, Managing Director, CR Forex Advisors, observed that if the Chinese currency has weakened 5 per cent and the rupee has weakened only by 2 per cent, then relatively, the Indian currency becomes a better performing currency.
“We have got huge forex reserves. Our growth story is intact. Inflation is low. Because of these factors, our currency is not weakening. RBI is managing the currency well,” Pabari said.
CARE Ratings Economists noted that the rupee remained constricted within the 81-83 band on aggressive RBI intervention, irrespective of the dollar’s performance through the past month.
“Overall, we expect the rupee to remain in the 81-83 range by the end of FY24, with an improving current account deficit (CAD), capital inflows, lower oil prices and positive real rates contributing to a positive bias.
FPIs
“Foreign Portfolio Investor (FPI) flows rose to $5.8 billion in May, its highest level in 9 months, with the positive trend continuing in June,” they said.
Sinha and Vahadane underscored that the rupee has traded within a tight range of 81-83 since late 2022 on active RBI intervention.
The Indian currency was largely supported by overseas inflows, lower oil prices and positive real rates. FPI flows rose to $5.8 billion in May, its highest level in 9 months, with the positive trend continuing in June.
Renminbi depreciation
The rating agency’s economists said Chinese renminbi’s depreciation following rate cuts by the People’s Bank of China (PBoC) is likely to put pressure on rupee, to remain competitive on the export pricing front.
Moreover, a declining renminbi-rupee could make imports from China attractive, further straining India’s trade deficit with the Asian giant.
Elara Securities, in a report said, the rupee’s response to the US dollar’s decline has been muted in the wake of RBI’s intervention in spot and forwards.
Additionally, the expectation of a prolonged pause by the Monetary Policy Committee as against chances of another rate hike by the Fed is also driving movement in the pair.
“The RBI’s preference for a ‘ranged rupee’ suggests that it may continue to build reserves as FII flows improve….Expect an upside in dollar-rupee in H2FY24 end, pushing it to 81 levels.
“Near term, expect the RBI to continue accumulating reserves to build buffers; thus, expect the dollar- rupee to stay range-bound at 81-83,” Elara Securities said.