Informist, Friday, Feb 3, 2023
NEW DELHI – The rupee is likely to appreciate against the dollar in February due to a broad-based weakness in the greenback as the US Federal Reserve is approaching the end of its rate-hike cycle. However, persistent outflows of foreign funds are widely expected to stand in the way of any sharp gains for the Indian currency.
The median of an Informist poll of 13 respondents from banks and corporates showed the rupee may settle at 81.63 a dollar by the end of this month, as against 81.92 at the end of January. Only two of the poll participants see the domestic currency strengthening beyond 81.00 a dollar.
With a fall of almost 1.4% last month, the dollar index has been losing steam ever since inflation in the world’s largest economy started to cool off sustainably. Validating the market’s optimism, the Fed toned down the pace of rate hike at its recent policy meeting to a token 25 basis points, and Fed Chairman Jerome Powell acknowledged that “the disinflation process has started.”
“The dollar index weakness will sustain, I think overall, the dollar index will correct over 96 level,” said Ritesh Bhansali, vice-president at Mecklai Financial Services. “The data coming out of Europe and the UK is reasonably stronger against what was expected. So that is also giving some support.”
Market participants believe weakness in the US unit may also sustain due to continued price pressures in the UK and Eurozone, and the subsequent hawkish monetary policies in both the developed economies.
As opposed to the significant foreign portfolio inflows seen in January, the current month is likely to witness capital outflows, which may put some pressure on the rupee.
The domestic equity market has been struck by risk aversion after release of a hard-hitting report by US-based short-seller Hindenburg Research that alleged “brazen stock manipulation and accounting fraud” by Adani Group. This cast a shadow on the much talked-about 200-bln-rupee follow-on public offering of Adani Enterprises Ltd, which eventually culminated in withdrawal of the offer.
In January, FPIs pulled out nearly $3.6 bln from the domestic equities, of which, $2.06 bln was withdrawn after the release of the Hindenburg report on Jan 24. As the subscription amount was returned to investors, the immediate reversal of the flows pushed the rupee to settle past the psychologically-crucial level of 82 per dollar on Thursday–for the first time since Jan 9.
Market participants are now of the view that any further adverse developments related to Adani Groups’ stocks will add pressure on the Indian currency.
“I think more-or-less it has been done now, most stock price movements have been reflected in the rupee,” said Ritesh Bhusari, deputy general manager at South Indian Bank. “Only if any rating agency downgrades the rating of the group, then maybe there’ll be some repercussions.”
Further, market participants expect overseas portfolio inflows to remain subdued in the domestic equity markets due to fear of a looming global recession, and the reopening of China’s economy after COVID-induced lockdowns. Analysts are of the view that increased investment into Chinese equities in the coming months will eat into the portfolio allocations towards other emerging markets, including India.
During the past month, the Indian unit was confined to a narrow range of 81.00-82.00 per dollar as the Reserve Bank of India stepped in to intervene on both sides from time to time. The RBI actively purchased dollars in the spot market to contain a runaway appreciation in the rupee when the local currency appreciated to as much as around 80.90 a dollar.
Market participants expect the central bank to continue intervening in the currency market to contain volatility. They said the RBI may buy the greenback around 81.00 a dollar to gather ammunition to deploy in case of foreign currency outflows, while continuing to protect the 82.00-82.50 levels.
“The RBI will try to keep the rupee stable, and smooth-out volatility,” said Dhiraj Nim, FX strategist at ANZ Research. “Intervention will also likely be skewed to the forward book to avoid any short-term liquidity consequences domestically.”
US$1 = 82.26 rupees
(With inputs from Ananya Chaudhuri)
Edited by Manisha Baxla
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