Analysts see rupee at 76.5; Four factors that may guide the trajectory

Rupee vs Dollar: Over the short-term, currency watchers expect the rupee to fall on the back of the RBI's plan to buy government bonds worth Rs 1 trillion from the secondary market

After suffering its biggest one-day fall since August 2019 on Wednesday, the rupee appreciated by 10 paise on Thursday to quote at 74.37 against the US dollar in intraday deals. It nosedived 1.52 per cent on April 7 and closed at 74.56 to a dollar — the lowest since November 13, 2020.

The local currency came under pressure after the Reserve Bank of India (RBI) committed to buying Rs 1 trillion bonds from the secondary markets in the first quarter of fiscal year 2021-22 (Q1FY22). The 10-year bond yields fell as low as 6.06 per cent after the monetary policy announcement on Wednesday. READ ABOUT IT HERE 

The fall in yield, however, tightened the spread between the yield on 10-year India government bond and US 10-year government bond. The yield spread is now down to 4.42 per cent, from 5.76 per cent in April last year, and the three-year average of 4.9 per cent. Generally, when the yield spread tightens against a certain currency, then that currency depreciates against other currencies, which possibly happened with the rupee on Wednesday.

Amid the domestic headwinds and global tailwinds, analysts expect the rupee to drift lower towards the level of 76.30 to 76.50 over the next two to three months. Technically, USD-INR Spot holds resistance near 74.80-75.30 levels where support is at 74.20-74.00 levels over the short-term.

“Over the medium-to-long term, the dollar may return to 68.7 levels once the US Bond yield cools off and once crude oil prices come down,” said Kshitij Purohit, lead analyst - Currency & Commodities at CapitalVia Global Research.

Here’s what may guide the rupee going-forward:

RBI’s OMO/G-SAP plan: Over the short-term, currency watchers expect the rupee to fall on the back of the RBI's plan to buy government bonds worth Rs 1 trillion from the secondary market. The purchase of bonds under the government securities acquisition programme or G-SAP could go up to Rs 3 trillion in the current fiscal.

“A defined primary liquidity infusion via the bond program is de-facto a secondary Quantitative Easing (QE) of RBI. This will imply massive narrow money growth and primary liquidity which is clearly going to put depreciation pressure on the rupee,” said Madhavi Arora, economist at Emkay Global Financial Services in a post-policy note.

FII/FPI flows: Hitesh Jain, lead analyst – Institutional Equities at YES Securities believes that foreign portfolio flows will sustain in emerging markets (EMs), including India, given the growth and bond yield differentials between developed markets (DMs) and EMs.

“Although 2021 US GDP growth is projected at 6.5 per cent, it is more due to the depressed base effect. Going in 2022 and 2023, US GDP growth will fall back to historical average of around 2.5-3 per cent while India's GDP growth will average 6-7 per cent for the next five years, keeping prospects brighter for the latter,” he says.

That apart, reports suggest that the new US government is eyeing an increase in corporate taxes, and which may affect people earning more than $400,000/year.

“In this case, corporations may find more possibilities in EMs. The Indian government is also focusing to capture this opportunity and is lobbying for getting the maximum part of this investment,” Purohit of CapitalVia said.

Dollar index:  According to Ventura Securities, the Dollar index has strengthened by 2.9 per cent over the past two months due to higher bond yields and a rebound in the global economy. Any further increase in the Dollar index, it says, may put pressure on the Rupee in the coming days.

Domestic economy: The pace of economic recovery has come under cloud amid a spike in Covid-19 cases. This, Sugandha Sachdeva, vice president - Commodity and Currency Research at Religare Broking, says is acting as a drag on the nascent stage of recovery.

“Besides, the RBI maintaining its status-quo on key rates coupled with rising crude prices are likely to create inflationary pressures in the economy, eventually undermining the sentiments for the rupee,” she says.