Rupee caught in the middle of global & local pull, say experts
If RBI lets rupee appreciate after dollar inflow, India’s export competitiveness will be hampered
Two opposite forces are at work to keep the Indian rupee trading on a narrower, stable course, and that should continue for some more time, say, currency watchers.
Foreign money poured in for the initial public offering (IPO) of Zomato, and there is now a robust pipeline of big-name IPOS.
But the US dollar is also gaining strength against emerging market currencies after the Federal Reserve indicated at least two hikes by 2022. A renewed surge of Covid infection is also keeping global risk appetite at bay.
It is a dilemma for the Reserve Bank of India (RBI). If it lets the rupee appreciate following the dollar inflow, when other peers are depreciating, India’s export competitiveness will be hampered. But the rupee has moved sharply since June, and there are predictions of the currency hitting 76. That level would also be in line with how the Asian currencies have been depreciating. But the weakness of the local currency will also certainly lead to outflow of existing investment, as the investor would be able to repatriate less of his local earnings.
And so, RBI’S endeavour would most likely be to strike a balance. With that in mind, the central bank has stepped up intervening in the market in the last few days.
“RBI was buying the dollar all along in the spot market, and releasing rupee liquidity. This excess liquidity will certainly not let the rupee appreciate a lot,” said Imran Kazi, vice-president at Mecklai Financial, a currency consultant.
He also expects the inflows to continue because of a series of IPOS lined up. But the markets would be looking at the ‘dot plots’ more than anything else “and that should be pro-dollar from here on,” said Kazi.
There are two opposite forces at play here. The US Federal Reserve’s ‘dot plot’ indicates that there could be at least two rate hikes by the end of 2022. The renewed surge in infection has also given rise to risk aversion across the board.
Asian currencies have weakened since mid-june when the US Federal Reserve announced its intention to slowly unwind the accommodative policies. Fed Chair Jerome Powell has sounded dovish since then, but the currencies have not scaled back much. From about 73 a dollar level on 9 June, the rupee crossed 74 by 17 June. On Friday, the local currency had closed at 74.56 a dollar.
But the IPOS could exert an opposite pressure for the rupee to appreciate. The RBI would want to mop up the flows and boost its reserves further, as Governor Shaktikanta Das sees reserves as the best safety net for the emerging markets.
The capital flow has been strong in India in the past year. In fiscal year 2020-21, net foreign portfolio investment (FPI) flow was $36.18 billion. So far this fiscal year, the strong flow has been tapered by debt outflow. Still, the net is a positive $137 million. Foreign direct investment (FDI) has been the highest ever at $81.72 billion in 202021. All these were soaked up by the RBI, which boosted the reserves by more than $100 billion to a record $611 billion-plus.
The local currency could have depreciated more, and analysts were predicting ~76 to a dollar, but dollars started pouring in after the Ant groupbacked Zomato announced its IPO plans. The offer was oversubscribed 38 times. Qualified institutions buyers bid more than 50 times the quota reserved for them. The IPO was oversubscribed 38 times.
The excess money will return now, putting some pressure on the exchange rate, but companies will come back with new IPOS in place.
Among IPOS lined up in July and August are Pepsico-bottler Devyani International, Paras Defence and Space Technologies, Go Airlines, Seven Islands Shipping, Aadhar Housing and ESAF SFB, among others. In the coming months, several big IPOS are expected such as Star Health, and even Life Insurance Corporation of India.
These IPOS will continue to attract big foreign money, keeping the rupee well supported, currency dealers say.
“If the RBI continues to play its part to curb volatility downside, any dips in the dollar-rupee pair would be taken for buying by importers. For exporters, it would remain sideways to sell,” said Amit Pabari, managing director (MD) and chief executive officer (CEO) of CR Forex.
“So far, the rupee has been supported by the inflows pertaining to IPOS. If inflows see a standstill, a depreciation pressure resides on the rupee and can take it towards 75.20-75.50 levels,” Pabari said.
“Downside in the dollar is likely to be limited in the coming week,” said Abhishek Goenka, MD, and CEO of IFA Global.