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As rupee gets past 74.5, Street speculates why RBI let it rise.

Date: 27-08-2020
Subject: As rupee gets past 74.5, Street speculates why RBI let it rise
NEW DELHI: The rupee climbed a five-month high by breaching the psychological mark of 74.32 against the dollar NSE 2.76 % on Tuesday. The 74.50 level had been offering stiff resistance to the currency in recent time, market watchers blamed it on RBI’s interventions around the level on several occasions in the past.

But this time, the central bank appeared to have let the domestic currency rise past this mark. A strengthening rupee can have a bearing on top lines of export revenue-earning businesses like IT and pharma, sectors whose stocks have been seeing a euphoric rise in the recent months.

Analysts said RBI might have let the rupee rise as it does not want currency market participants to get complacent of this resistance level. Nonetheless, it continues to curb volatility in the market.

Many favourable macro factors, too, are at play, helping the rupee to rise, they said. They see a near-term ceiling for the domestic unit at 74 level while long-term projections suggest the currency may head lower towards 75.5 and 76.8 levels over the next 12 months.

The reason why the central bank could have let the level break is to shatter the complacency and prevent speculative positions from building up. We had seen a similar move on July 2, when the central bank had allowed the currency to breach the 75.40 level,” IFA Global said in a note.

On Wednesday, the domestic currency rose 5 paise to hit a high of 74.28 against the greenback, which has been weakening in recent weeks.

Sugandha Sachdeva, VP for Currency Research at Religare Broking, said a couple of factors are at play for the rupee.

“The first is the recent fall in the Dollar Index, whose trajectory has been on the downside for the past couple of months, which is pushing emerging market currencies such as the rupee to go higher. Besides, unprecedented stimulus globally has led to risk-on trade, bringing in huge foreign portfolio money into Indian equities, which has also supported the domestic unit,” she said.

The Dollar Index, which measures the value of the greenback against a basket of six major world currencies, has fallen from 103-level in March to 93-level now.

Data showed foreign investors have pumped in over Rs 40,000 crore worth dollars in Indian markets in August alone, in addition to an aggregate Rs 43,934 crore that flowed in the previous three months. This marked the highest FII inflows to Indian equities in 118 months, or since October 2010. FPIs net purchased stocks worth $5.43 billion during the month till August 21, which was lower only than the $6.42 billion inflows seen in October 2010.

Sachdeva said RBI was mopping up dollars in the past whenever the rupee was appreciating, which was taming the upside.

“A rise in the rupee was being anticipated for long. It is happening since RBI now has sufficient reserves” she said.

Sachdeva, however, expects RBI to step in if the rupee rises past the 74 mark.

There were reports recently that RBI board members feel the central bank has built big enough dollar reserve by now and the cost of more dollar purchases may outweigh the gains from the overflowing reserve chest.

So, some members floated the idea of diversifying RBI’s reserves more in favour of gold from here on.

Sachdeva felt breaching the 74 level would be a daunting task for the rupee.

“If the breakout does happen, we will see the rupee first rise to 73.50 level and then 72.80. But any such gains may not be sustainable. The domestic currency may eventually drift lower to the 75.50-76.50 range in the medium term,” she said.

Data showed RBI’s forex reserves for the week ended August 14 stood at $535.252 billion, the fifth largest in the world.

Lakshmi Iyer of Kotak Mutual Fund says for the first time in over 12 years India would see a marginal current account surplus, which is also a positive for the currency.

“Because of certain specific sectors, we have seen FDI inflows. On a net basis, in all likelihood, we will end up having similar FDIs to what we had last year despite the Covid crisis. Obviously, FPI flows into equities continue to be reasonably buoyant at least in the recent past. This augurs fairly well from the currency. While we are not hoping for acute depreciation or outrageous appreciation from the current levels, we expect the central bank to ensure that it remains rangebound for now,"

Iyer expects rupee to trade in the 74-76 range.

IFA Global expects the trading range to shift lower to 73.60-74.60 over the next 4-6 weeks, if the dollar stays largely stable.

It noted that the rupee tested the 74.50 level multiple times earlier and nationalised banks have been seen purchasing US dollars aggressively in recent times.

"The reaction function of RBI to purchase dollars aggressively can result in expectations getting skewed. Market participants were comfortable selling downside with the 'implicit RBI Put'. If the inflows continue and the central bank continues to absorb them and accumulate reserves, we may see market participants sell on the downside. However, in order to safeguard against the central bank stepping aside some day, they may also consider buying deep out of the money, low delta Puts,” it said.

Meanwhile, Barclays in a note said that there could be large revaluation losses if the rupee were to appreciate materially., given the growth of India’s foreign reserves and the RBI’s own balance sheet.

This risk, it said, may ultimately lead to a policy preference to hold the exchange rate in a small range or marginally weaker at 72.9-76.0 to prevent the RBI from breaching the limits set out under its new capital adequacy framework," Barclays said.

Source:- economictimes.indiatimes.com

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