Rupee slides 0.5% as importers continue to lock in dollar purchases

FPI outflows, likely RBI dollar purchases weigh on domestic currency

The rupee extended its losing streak this week, shedding 0.5 per cent versus the US dollar over the past couple of days, as importers continued to lock in dollar purchases after a sharp appreciation in the domestic currency last week. 

The rupee settled at 81.77 per US dollar on Tuesday as against 81.62 per US dollar on Monday. The domestic currency had closed at 81.34 per US dollar at the end of the previous week. The rupee had strengthened 1.7 per cent versus the dollar last week. 

Purchases of the US dollar by the Reserve Bank of India and persistent outflows of overseas investment also dragged the rupee lower, currency traders and analysts said.

“RBI may be intervening because the way the exports are contracting, they may look to give a support to the market. It was initially believed that the RBI may step in closer to the 80/$1 mark but it seems like RBI may have come in closer to 81/$1. Most importantly, the FPIs (foreign portfolio investors) are still on the sell side,” Anindya Banerjee, VP - Currency Derivatives & Interest Rate Derivatives at Kotak Securities said.

“Even a bit of buying (of dollars) from the nationalised banks can push prices higher because speculators are not confident to short the US dollar with the forward premia so low,” he said.

A dealer with a state-owned bank said that the central bank was likely to have picked up US dollars around the 81.40-81.50/$1 mark.

So far in January, foreign portfolio investors have been net sellers of Indian equities worth $2.1 billion, NSDL data showed.

Latest government data showed that India’s merchandise trade deficit widened to $23.8 billion in December 2022 from $23.4 billion a month ago. The higher deficit was mainly on account of a sequential moderation in oil exports while imports remained steady, analysts said.

“India’s exports exhibited positive annualized (YoY) growth in 3 out of 14 sectors in Dec-22, with headline growth reverting to a contraction of 12.2% YoY vis-à-vis an expansion of 9.6% in Nov-22. Sequential moderation in exports was predominantly on account of petroleum products even as machinery items, chemicals, textiles, and agri & allied Products posted a mild expansion,” economists from Quant Eco research wrote.

Dealers said that a recent rebound in global crude oil prices had also contributed to the rupee’s weakness this week as oil importers had rushed to lock in dollar purchases at relatively lucrative levels after the rupee’s gains last week. The local unit had appreciated 1.7 per cent against the US dollar in the previous week.

Brent crude oil prices rose more than 8 per cent in the previous week, driven by increasing economic activity in the China, the world’s second largest economy. Higher crude oil prices pose upside risks to India’s current account deficit, given that the country is a major oil importer.