Rupee breaches 80/USD mark yet again, RBI likely to come to the rescue

• US Dollar Index (DXY) is at its highest level in over 20 years, putting pressure on all other currencies, including the rupee.
  
• A volatile currency makes it challenging for FPIs to carry trade flows in emerging markets, says Anindya Banerjee of Kotak Securities.
  
• Mecklai predicts that RBI will be willing to spend another $20-$50 billion to defend the rupee.
  
• A recent report by Standard and Poor also said that India has built up buffers to deal with cyclical difficulties.
  

The rupee fell below 80 against the US dollar yet again — a month and a half of hitting this record low. Even as the euro and pound depreciated on Friday, the rupee futures maturing on September 28 appreciated, amid weakness in crude oil prices. The rupee was supported by foreign fund inflows, said ICICI Direct’s currency analysts.

The local currency, which has been volatile all week, fell to 80.11 against the dollar even as it was comfortably below this level in the last trading session at 79.87. But the hawkish commentary by the US Fed has changed its course yet again.

A research report by Mecklai Financial says that the US Fed is focused on taming inflation by continuing to raise interest rates and holding them there for as long as necessary, even if it means pushing the economy into a recession.

“The moves have, of course, pushed the US Dollar Index (DXY) to its highest level in over 20 years, which is increasing the pressure on all other currencies, including the rupee,” the Mecklai report said.

The FPI inflows which have just turned green in July after hitting record outflows in the last seven months – will now be under pressure too, due to the volatile rupee.

“USDINR is on a strong wicket, with such a positive USD backdrop. A strong US Dollar Index, high US bond yields with a deeply inverted yield curve and weak equity markets all make it challenging for FPI and carry trade flows in emerging markets,” said Anindya Banerjee, VP - currency derivatives and interest rate derivatives at Kotak Securities.

The Indian stock markets too saw the full impact of the fall triggered across markets along the world by Fed Chair’s comments. Crude oil prices too have started climbing up to trade at around the $100 per barrel mark.




Source: Mecklai Financial

RBI appears unbowed in the ‘battle for 80’

The speed of the Rupee movement will be closely regulated by RBI, says Banerjee and Mecklai too agrees that RBI will join the ‘battle for 80’.

The central bank has been intervening to hold the Rupee up against the dollar, by spending around $70 billion, this year. Almost $50 billion of this was released towards net spot sales, “but RBI appears unbowed” according to Mecklai.

The report predicts that RBI will be willing to spend another $20 or even $50 billion to protect the level that they are not specifically focused on. However, it advises investors not to take any fresh bets on the rupee.

Banerjee too says that RBI has twin objectives of not letting the Rupee become a weak outlier and also, not wanting the USDINR to become too volatile.

“This means they may continue to sell USD as the spot and forwards moves to a fresh all-time high. However, this may not alter the trajectory of the pair and the path of least resistance would remain upward. We expect a range of 79.70 and 80.50 over the next one to two weeks,” he says.


The ‘buffer’ that India has

A recent report by Standard and Poors also said that India is well positioned to battle the cyclical difficulties caused by dollar dominance, high commodity prices due to the buffers it has built up.

“The key differentiator for India continues to be that the country is facing these challenges, these stresses from a position of relative strength,” said Andrew Wood, director of sovereign and international public finance rating.

In spite of RBI releasing a lot of its dollar into the spot market, its foreign exchange reserves stood at $570 billion as on August 12.

Wood also said that he expects the reserves to recover moderately to around $600 billion by the end of this year, and remain relatively flat over the next few years.

In September 2021, Indian forex reserves stood at $642 billion.


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