Experts see limited upward move for rupee amid return of foreign investors

Rupee's upward move against dollar is primarily driven by net FII investment getting positive after having sold shares worth Rs 1.4 lakh crore in the current financial year.
Image used for representational purpose. (Photo| Sindhu Chandrasekaran)
Image used for representational purpose. (Photo| Sindhu Chandrasekaran)

NEW DELHI: Indian rupee strengthened one per cent against dollar in a reversal of trend, when the local currency breached the 77 levels in the previous week. Can rupee sustain the gains as foreign institutional investors return to Indian equity markets and geopolitical tensions ease?

The Indian Rupee ended Thursday at 75.90 posting the biggest weekly gain in nearly 3 months against the dollar, raising hopes that rupee might gain past 75 levels to settle anywhere around 73-74. Rupee's upward move against dollar is primarily driven by net FII investment getting positive after having sold shares worth Rs 1.4 lakh crore in the current financial year. On Thursday, FIIs purchased equities worth Rs 2800 crore.

Another factor that is driving the Rupee is falling crude prices, which after touching USD 140 a barrel dropped below USD 100. On Friday, it was trading at XXX. The interest rate differential between US and India also turned negative as inflation in the US topped 7.5 per cent against India's 6 per cent. This removes the downward bias against rupee. But are these good enough for rupee to settle anywhere between 73 and 74?

Experts say favorable factors which have resulted in short-term appreciation of rupee might not support the local currency beyond a certain level.

The rupee is already reacting to external tensions and, we believe, will depreciate further and settle around 77.5 a dollar by March 2023, says a report by rating agency Crisil. According to it, two factors will play a pivotal role in driving the weakness -- higher energy prices widening the current account deficit, rate hikes by US Fed resulting in capital outflow.

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