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The rupee extended a stellar strengthening streak on Wednesday. It has gained 1.5 per cent so far this week as foreign investment flows continued to hit the currency market and as dollar demand from oil companies shrank, dealers said.
The rupee closed at 81.58 per US dollar on Wednesday, as against 81.79 per dollar at the previous close. The domestic currency ended the previous week at 82.78 per US dollar.
Over the past couple of days, the rupee has outperformed all its emerging market peers, traders said. This stands in stark contrast to the previous month, when the domestic currency fared worse than all its peers.
“Historically, the rupee has always been peculiar. The narrower it trades, the more lethal it becomes for a breakout either side. Considering DXY (dollar index), Chinese Yuan, and oil, it was expected that the USD/INR pair may trade below 82 levels with time. Stop losses getting triggered help the rupee appreciate sharply,” said Kunal Sodhani, vice-president of Shinhan Bank (Global Trading Centre).
Apart from firm foreign flows, the strengthening of hopes of the US Federal Reserve slowing down the pace of its rate hikes and a lack of significant dollar purchases by the Reserve Bank of India (RBI) contributed to the rupee’s recent run, dealers said.
“The USD/INR pair has gained in recent days on dollar weakness, some bunched up foreign inflows and lack of intervention by the RBI below 82 levels that led to further increase in the appreciation momentum,” according to HDFC Bank’s treasury research team.
Higher US interest rates lead to a stronger dollar, exerting pressure on emerging market currencies like the rupee. The US Fed raised interest rates by a massive 425 basis points in 2022 to battle high inflation in the US.
The Indian central bank was said to have replenished its dollar reserves through purchases of the greenback throughout November and parts of December. This kept the rupee confined to a tight band and reined in any appreciation in the local unit.
After falling by around $100 billion from late February to September end, the RBI’s foreign exchange reserves climbed $30 billion to $562.85 billion by December end.
The RBI’s reserves had fallen sharply in 2022, partially due to sale of dollars to prevent excessive volatility in the rupee amid the Ukraine war and the US Fed’s monetary tightening. The strength of the US dollar also dragged the RBI’s reserves lower due to revaluation. The rupee weakened 10.2 per cent against the US dollar in 2022.
Analysts were, however, uncertain about the extent to which the rupee could strengthen from its current levels, given persistent global headwinds.
“However, we do not see these gains sustaining over the coming days. Given the rising risks in the system, including uncertainty around the Fed rate hike path, global recession fears, and the China re-opening effect – all make a case for a breakout from this range and a shift higher over the coming weeks,” HDFC Bank’s treasury research team wrote. HDFC Bank forecasts a near-term range of 81.50-83.50 per US dollar for the rupee.
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