Rupee gains sharply against US dollar as MSCI rejig spurs flows

The rupee strengthened sharply against the US dollar on Wednesday as the semi-annual rebalancing of the MSCI India index propelled inflows and as some foreign banks sold the greenback on behalf of overseas firms looking to invest here, dealers said. 

Strength in the Chinese yuan also lifted the rupee along with other Asian currencies, dealers said, adding that in November, the domestic currency had logged its first monthly gain since December 2021. 

The rupee closed at 81.43 per US dollar on Wednesday as against 81.72 per dollar on Tuesday. In November, the rupee gained 1.65 per cent against the dollar, marking the first monthly appreciation of the calendar year so far. 

So far in 2022, the domestic currency has shed 8.7 per cent versus the US dollar. Dealers said the combination of dollar sales on account of the corporate inflows and the rebalancing of the MSCI index had resulted in the rupee strengthening past the technically significant 81.45 per dollar mark on Wednesday. 

“As MSCI inflows hit the market USD/INR fell from a high of 81.65 to a low of 81.45. Asian currencies were also stronger as CNH (yuan) rose to 7.13 levels. Dollar index was near 106.60 - stable. Indian equities made new records as they moved up,” Anil Kumar Bhansali, head of treasury, at Finrex Treasury Advisors said.

“Still expecting a range of 81.20 to 81.80 as we wait to see whether RBI buys dollars or not,” he said.

After a volatile few months which saw the rupee mark successive fresh lows against the dollar, the domestic currency has stabilised in November. This is largely due to a lower-than-expected inflation print in the US, which has strengthened hopes of the Federal Reserve opting for a lower quantum of rate hikes going ahead.

The rapid pace at which the Fed has tightened monetary policy in 2022 – the US central bank has hiked rates by 375 basis points since March – has led to global funds rushing towards the higher returns in the world’s largest economy. This has led to gains for the dollar and exerted pressure on currencies such as the rupee.

“Indian rupee registered the first monthly gains in the past eleven-month following rebound in the risk assets, lower crude oil prices and foreign fund inflows. It is poised to end the month 1.6% higher, its biggest gain since August 2021,” Dilip Parmar, research analyst, HDFC Securities said.

“The dollar index slipped, weighed by ongoing demand for riskier assets as investors speculated that China may gradually unwind its Covid curbs. In the near term, spot USD/INR is expected to trade lower with downside support at 80.70 and resistance at 82.10,” he said.

While the outlook on the rupee has improved, gains were capped for the domestic currency ahead of a speech by US Fed Chair Jerome Powell on late Wednesday. Powell’s views on the extent of future Fed rate hikes will play a key role in determine the trajectory of the rupee. Hints of a higher degree of policy tightening could sour appetite for the local currency, traders said.

“The USD/INR pair has been moving between the 81.40 and 82.00 for the past couple of days. The market participants were waiting for the statements by the FED chair, who is expected to give some guidance with respect to the terminal rate,” Anindya Banerjee, VP - Currency Derivatives & Interest Rate Derivatives at Kotak Securities said.