After falling to record lows, rupee regains footing against US dollar

RBI's interventions and a less hawkish view on US Federal Reserve among factors that help currency

The rupee is holding ground after depreciating rapidly against the US dollar over the last seven weeks, as targeted interventions by the Reserve Bank of India (RBI) and other factors give it strength.

The Indian currency on July 21 fell to 80.06 against the dollar, breaching the psychologically significant 80 per dollar mark for the first time two days earlier.

But since then the rupee has not crossed that mark and instead gained ground. It was at 79.78 per dollar a little before 11am on Tuesday.

In two trading days since July 21, the domestic unit has strengthened 0.3 per cent versus the greenback. Some analysts believe that the rupee could head for calmer waters after two months of turbulence.

In the 37 trading days from June 1 to July 21, the rupee lost 3 per cent versus the US dollar. The rupee’s depreciation against the dollar was worse than many of its peer currencies in emerging markets, such as the Malaysian ringgit and the Indonesian rupiah.

The depreciation over 37 days is even starker when one considers that the rupee shed 7.1 per cent versus the dollar from January 1 to July 21. Over those 37 days, the rupee weakened on 24 days, gained on nine days and closed steady on 4 occasions.

A major reason for the volatility in the exchange rate was the global rush to the safety of the US dollar amid concerns of an economic slowdown worldwide—a worry fueled by the Ukraine war and the Federal Reserve’s plans to raise interest rates.

The US dollar index, which measures the greenback against six major currencies, on July 14 climbed to a 20-year high of 108.54, Bloomberg data showed.

Amid a strong dollar and expected higher US interest rates, foreign portfolio investors (FPIs) stepped up their selling pressure in Indian equities. They offloaded $6.4 billion of stocks in June, the highest monthly outflow so far in 2022.

The outlook, it seems, has now changed. FPIs have turned net buyers of Indian stocks in July, albeit by a small amount. NSDL data showed that FPIs had net bought $53 million of domestic stocks so far in July. Overseas investors have net sold stocks every month since September 2021.

With more and more forecasters predicting a US economic recession--a possibility been acknowledged by the Federal Reserve Chair himself--the likelihood of the US central bank dialing down the pace of monetary tightening is growing stronger.

From being certain of the Fed announcing a 100-basis-point rate hike in its next policy statement on July 27, more and more investors feel the central bank would hike rates by 75 bps and then perhaps slow down later in the year.

The European Central Bank’s decision last week to raise interest rates for the first time in 11 years has also taken some of the sheen off the American currency, with the US dollar index last around 106 levels, well below the highs seen earlier in the month.

“In my view Dollar Index has seen a temporary top as ECB has also started hiking rates as a result of which EURO has also strengthened,” Bhaskar Panda, senior vice-president at treasury advisory group at HDFC Bank, told 'Business Standard'.

“Global crude oil prices also have stabilised as commodity prices have come down. Recent FPI figures suggest positivity. Hence I expect USD/INR to trade between 79.50-80.50 per US dollar. If conditions improve USDINR may even trade below 79.5000.”

After touching a 14-year high of $140 per barrel in March, Brent crude futures have significantly cooled, with the most active contract last around $102 per barrel.

The retreat in the dollar index aside, a factor that has brought stability to the rupee is also the nature of the RBI’s interventions through dollar sales, currency traders said.

The RBI, which last week said it has zero tolerance for excessive volatility in the exchange rate, is believed to have been aggressively defending the rupee near after the 80 per US dollar mark through sales of the greenback from its reserves.

“The influence of foreign inflows, a sharp correction in oil prices, and the return of RBI in defense of the rupee with spot intervention; have helped the rupee gain after the past week’s losing streak. The same has made it tough to breach USD/INR above 80 levels,” CR Forex Advisors MD Amit Pabari wrote in a note.

The rupee’s course over the rest of the year will depend on the extent to which the Federal Reserve is prepared to hike rates and tame inflation in the US.

If, as many analysts believe, concerns over a recession would start featuring more prominently in the Fed’s deliberations, the Indian rupee may have seen the worst of the volatility.