Sudden movement of the rupee is not a reason to panic, say currency dealers

The sudden movement of the rupee — post the monetary policy — is not a reason to panic, said currency dealers.

According to them, a correction was overdue for the rupee that remained the best performing currency in the region for well over a month.

The rupee closed at 74.72 a dollar on Friday from its previous close of 74.60. It had dropped 1.52 per cent against the dollar on April 7 after the Reserve Bank of India (RBI) announced its monetary policy, committing to buy Rs 1 trillion of bonds in the June quarter.

A weak rupee goes well with the export narrative of the government, and is consistent with the RBI’s intervention strategy that prevented an appreciation.

The central bank accumulated more than $100 billion in just nine months, mopping up inflows even as the country turned trade and current account surplus due to low import demand and soft oil prices.

The rupee can slide a little more, but there would unlikely be a currency crisis, said dealers. In any case, they feel the RBI’s reserves are good enough to stabilise sudden volatility induced by a flight of capital.

In the past, RBI governor Shaktikanta Das vigorously defended India’s stance on accumulating reserves, citing a possible reversal of portfolio flows from emerging markets like India.

Foreign investors poured in $30,296 billion in fiscal year 2020-21, in both debt and equity. However, in April, they have been net sellers. The reason for this is rising US bond yields, when Indian yields are heading down.

The 10-year bond yields in India closed at 6.18 per cent in the fiscal year-end, but has fallen to 6 per cent now. This has squeezed the arbitrage opportunity for foreign investors.

The RBI’s guidance suggests that interest rates and bond yields will remain low. The renewed surge in coronavirus has also witnessed outflow from local equities, making India a less attractive investment destination.

“The rupee was the best performing currency on a weekly and monthly basis among peers. But on a long-term basis, given inflation at 5 per cent, and being a current account deficit country, India cannot remain best performing for long,” said Samir Lodha, managing director (MD) and chief executive officer (CEO) of QuantArt, a treasury consultant firm.

Rather, the local currency’s strength was an “aberration, which has corrected now,” Lodha added.

According to him, the rupee’s level, for now, depends on foreign flows. It should stabilise around these levels if the flows remain steady. He felt that if the flows dry out, there would be pressure on the currency.

At over $575 billion in reserves, the RBI has enough means to iron out volatility.

Lodha said, if equity markets correct, the rupee can witness significant pressure. He feels a movement towards 76 a dollar is more likely.

If the equity markets continue as they are, the rupee should ideally scale back to 73-74 levels, said currency dealers.

Abhishek Goenka, MD of IFA Global, expects the rupee to be at 76.5 in the medium term, as flows slow down and it corrects some of its strength.

In the immediate term, the rupee could trade in the range of 74.60-75.10 a dollar, according to Sriram Iyer, senior research analyst at Reliance Securities.

Rahul Gupta, head of research, currency, Emkay Global, said the upcoming Fed policy this week would be a crucial clue for the markets. The rupee, meanwhile, could trade at 72.25-73.25 on an immediate basis, he added.