‘RBI intent is key to curb further rupee weakness’

Keeping bond yields down may take priority over rupee depreciation.  

The rupee’s near-term fortunes may directly be influenced by the Reserve Bank of India’s intent on preventing any further depreciation in the currency as the surge in COVID-19 cases hits jobs and growth, economists and traders said.

The rupee has already lost 2.6% 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.

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

A fortnightly Reuters 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.

‘Forecast is for 74.50-76’

The rupee closed at 75.01 to the dollar, and traders said they expect it to stay in the 74.50 to 76.00 range against the greenback in the near-term.

India reported 3,32,730 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 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 U.S. 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.

A weaker rupee helps exports and the RBI may prefer it, said economists. Negative real interest rates, potential GDP and earnings downgrades and rising inflation have also become headwinds.“The INR could continue to weaken in the absence of a strong anchor from the” RBI, as per ANZ.

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Printable version | May 15, 2021 3:31:19 AM |

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