Rupee better-performing currency amongst emerging market peers

the rupee It stood as one of the best-performing currencies among its emerging market peers, with expected volatility also falling to multi-decade lows in June. Currency volatility is an important consideration when investors are looking to profit from the interest rate differentials between two currencies.

The rupee remained bound within the 81-83 range on aggressiveness RBI Intervention regardless of the performance of the dollar over the past month.

“Continued two-way intervention from the Reserve Bank of India is also evident from the sharp decline in foreign exchange volatility,” said Rajani Sinha, Chief Economist, and Sonali Vhadan, Chief Economist, Care Ratings.

growth prospects

They added that the positive bias of the rupee can also be attributed to improved growth prospects, sound capital inflows, and lower oil prices.

Amit Babari, managing director of CR Forex Advisors, notes that if the Chinese currency declines by 5 percent and the rupee falls only 2 percent, then the Indian currency becomes a relatively better performing currency.

“We have huge foreign exchange reserves. Our growth story is sound. Inflation is low. Because of these factors, our currency is not weakening. The RBI is managing the currency well,” Babari said.

Economists at CARE Ratings noted that the rupee remained bound within the 81-83 range on strong intervention from the Reserve Bank of India, regardless of the dollar’s performance over the past month.

“Overall, we expect the rupee to remain in the 81-83 range by the end of FY24, with improving current account deficit (CAD), capital inflows, lower oil prices and positive real rates contributing to a positive bias.

FPIs

“Foreign portfolio investor (FPI) inflows rose to $5.8 billion in May, the highest level in 9 months, with the positive trend continuing in June,” they said.

Sinha and Vahadan assert that the rupee has been trading in a narrow range of 81-83 since late 2022 on active intervention from the Reserve Bank of India.

The Indian currency has been largely supported by outflows, lower oil prices and positive real rates. FDI inflows rose to $5.8 billion in May, the highest level in 9 months, with the positive trend continuing in June.

depreciation of the renminbi

Economists at the rating agency said that the depreciation of the Chinese renminbi after the interest rate cut by the People’s Bank of China (PBoC) is likely to put pressure on the rupee, to remain competitive in terms of export pricing.

Moreover, a lower RMB-R could make imports from China attractive, further straining India’s trade deficit with the Asian giant.

Elara Securities, in a report, said that the response of the rupee to the decline in the US dollar was muted in the wake of the intervention of the Reserve Bank of India in the spot and futures market.

In addition, the Monetary Policy Committee’s expectation of a prolonged pause against the chances of another rate hike by the Federal Reserve is driving the pair’s movement as well.

“The RBI’s preference for a ‘run rupee’ suggests that it may continue to build reserves as FII inflows improve… Expect a dollar-rupee rally at the end of H2FY24, pushing it to 81 levels.

In the near term, we expect the RBI to continue accumulating reserves to build buffers; Hence, expect the dollar-rupee to remain range bound at 81-83,” said Elara Securities.