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Indian rupee to slip further without RBI intervention

Dubai - The rupee has been choppy against other foreign currencies.

The Indian rupee could continue to weaken in the absence of a strong intervention by the Reserve Bank of India even as the devastating outbreak of a second wave of the pandemic posing strong headwinds to the country’s economic rebound.

The rupee has been choppy against other foreign currencies. “Apart from surging Covid-19 cases, factors such as country’s economic performance, the outlook for inflation, interest rate and capital flows will have an impact on currency exchange rates every day,” money experts said. (Check out the latest gold/forex rates in UAE)

Economists said the apex bank would continue to remain passive as a weaker currency will help boost the India’s exports. “In the absence of a strong anchor from the RBI the rupee could continue to weaken,” economists at ANZ said.

Negative real interest rates, potential GDP and earnings downgrades are also hindering the recovery of the currency that slipped on Sunday against the dollar to Rs74.93100.

The rupee has gained substantial value in line with other currencies of the world in the recent past as the trade deficit and the current account deficit have been improving. However, with the outbreak of coronavirus second wave, the currency has been seeing a fall.

Analysts said the rupee’s near-term fortunes may directly be influenced by the RBI’s intent on preventing any further depreciation in the currency as the surge in Covid-19 cases hits jobs and growth. The rupee has already lost 2.6 per cent against the dollar so far this month, putting it on the cusp of marking its worst month since the pandemic hit the country early last year.

The rupee is likely to trade with a depreciating bias on the back of a stronger dollar, relatively weaker emerging market or currencies, muted EM inflows and rising Covid-19 cases in India, said Sameer Narang, chief economist at Bank of Baroda.

A fortnightly poll showed bearish bets on the rupee climbed to their highest since last April, as the surge in infections has halted what had been seen as a promising growth story in the region.

Traders expect the rupee to stay in the 74.50 to 76.00 range against the greenback in the near-term.

India reported 332,730 new daily cases on Friday, the highest single-day tally anywhere globally. Rising cases have been one of the main factors behind the recent fall in the rupee, but the RBI’s decision to commit to large bond purchases has added to downside momentum.

The RBI has committed to buying ₹1 trillion worth of bonds in the April-June period in its effort to temper the rise in bond yields to help the government borrow its budgeted ₹12.06 trillion from the market at low interest rates. It said it would do more going forward, and this would be alongside its regular open market bond purchases and special open market operations — the simultaneous sale and purchase of government securities over different tenors — the equivalent of the US’ Operation Twist.

“We also believe the RBI’s policy priority of keeping a lid on G-sec [government bond] yields is more pressing than arresting INR depreciation,” economists at ANZ wrote. The road ahead for the rupee is likely to be complicated by rising inflation and faltering economic fundamentals.

The RBI has stressed it intervenes to smooth volatility in the forex market. It aggressively bought dollars last year as investors flocked to India but economists are unsure if the intervention on the downside will be as strong.

— issacjohn@khaleejtimes.com