As huge inflows into the nation’s capital markets help the currency break through the intervention barrier of the central bank, the Indian rupee is turning a corner. Last year, Asia’s poorest currency is now among its top performers. The rupee has risen 0.6% against the dollar this year, and there are signs it might continue to rally.
India’s equities are backed by a recovering economy and an expansionary budget, with investors buying nearly $4 billion of stocks this month, the most in Asia’s emerging markets after China. This is a challenge for India’s Reserve Bank, which has interfered in the currency markets to keep the rupee competitive.
Last week, the rupee climbed to 72.57 per dollar, its highest since March. That’s likely to clear the path to 72 per dollar for its advance. Furthermore, if the exchange rate breaks past the 100-week moving average barrier that has been held since April 2018, bullish momentum for the rupee could pick up.
With the latest economic growth estimates, an opportunity for further gains could come this Friday. Economists expect the data to show that in the fourth quarter, India exited a recession with a 0.5% year-on-year growth.
The accumulation of dollars by the RBI in 2020 had held the rupee back, as it formed a record foreign reserves. In 2020, Nomura Holdings Inc. reported that the central bank bought $126 billion from the currency market, or about 4% of its GDP, largely offsetting inflows.
However, the battle between the central bank and bullish traders is likely to continue, with Governor Shaktikanta Das suggesting last month that the RBI would not relent to build up its reserves of foreign exchange.
“While we may see INR strengthening on supportive inflows further in the near-term, we are cautious about the medium-term outlook,” an RBI employee was quoted as saying. “As the year progresses, rising crude oil prices and a widening trade deficit are likely to emerge as important headwinds,” he said.
