New Delhi: The Indian rupee is turning a corner, as massive inflows in the country’s stock markets help the currency to cross the barrier of central bank intervention.
The weakest currency in Asia last year is now among the best performing. The rupee has gained 0.6% this year against the dollar, and there are signs it may continue to rally.
The recovering economy and the huge budget are attracting global money to Indian stocks, as investors buy nearly $ 4 billion in stocks this month, the largest number in emerging markets in Asia after China.
This poses a challenge to the Reserve Bank of India, which has been intervening in the currency markets to keep the rupee competitive.
The rupee rose to 72.57 against the dollar last week, the highest level since March. The technical charts indicate that this will likely pave the way for a rally to 72 against the dollar. Analysts say in a Bloomberg survey that the currency will reach this level by the fourth quarter.
Moreover, the bullish momentum of the rupee could rise if the exchange rate crosses the 100-week moving average barrier that has been in place since April 2018.
The impetus for further gains could come on Friday with the latest economic growth numbers. Economists expect data to show that India emerged from recession, expanding 0.5% year-over-year in the fourth quarter.
The accumulation of dollars in the Reserve Bank of India (RBI) in 2020 pushed the rupee down, as it created record foreign reserves. Nomura Holdings estimated that the central bank bought $ 126 billion from the currency market in 2020, or about 4% of its GDP, most of it offsetting inflows.
Although the conflict between the central bank and bull traders is set to continue, as Governor Shaktikanta Das indicated last month that the Reserve Bank of India would not stop building its foreign exchange reserves.
“While we may see further strengthening of the Indian rupee in the near term due to the support inflows, we are cautious about the medium-term outlook,” said Divya Devish, head of foreign exchange research at ASEAN and South Asia at Standard Chartered Bank in Singapore.
“The rise in crude oil prices and the widening trade deficit is likely to generate important headwinds as the year progresses,” he said.