The Indian rupee is back in the spotlight. On Friday, it continued to depreciate against the US dollar amidst the surge in coronavirus infections, which is sparking uncertainty on economic recovery and prompting foreign equity outflows.
The rupee ended Friday’s session at 75.01, compared to 74.95 in the previous one. It has fallen 0.9 per cent for the week and 2.6 per cent against the dollar so far this month, emerging as one of the worst performers this month.
There is an added fear of downgrades from rating agencies due to the rise in Covid-19 cases which has also weighed on sentiments.
However, likely dollar sales by the RBI, along with other factors capped large-scale losses in the domestic unit, noted Sriram Iyer, Senior Research Analyst, Reliance Securities.
The day saw Asian equities and currencies rise, while the dollar index was down during afternoon trade and capped the weakness of the local unit.
In the overseas markets, the dollar index was trading weaker weighed down by the stronger euro, which moved higher after ECB President Christine Lagarde squashed speculation that policymakers may start to consider a tapering of bond purchases.
Importantly, in India, the second wave of the pandemic is keeping market risk sentiment light and the USD-INR spot float.
“So, the USDINR bulls will continue to be on driver’s seat, but we will only have to look for RBI intervention. We expect a broader USD/INR range to be 74.50-75.70,” said Rahul Gupta, Head of Research-Currency, Emkay Global Financial Services.
Analysts say that in the next week, and the weeks to follow, focus will be on Fed policy, which is expected to reiterate its dovish tone help the dollar stay subdued.
Some factors that will likely yield influence on the rupee include rising inflation, volatility in key economic parameters, negative real interest rates, a potential slowdown in GDP growth, and earnings downgrades.
Clearly, the near term outlook for the rupee may be directly influenced by the RBI’s moves on preventing any further depreciation against the greenback.
In the past, the central bank has emphasised that its intervention was only to smooth volatility in the forex market and that it does not target any level on the currency. That said, it aggressively bought dollars last year as foreign investors flocked to India, but it remains unclear if it will step in to arrest the downslide.
Rs 75.01 Value of one US Dollar