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As FY21 concludes, rupee loses some of its sheen

Wed Mar 31 2021

 

Rising greenback, possible dollar-purchases by nationalised banks weigh on the currency unit

 

Driven by a rising greenback and possible dollar-purchases by nationalised banks, the rupee suddenly turned weak on Tuesday, slipping to an intra-day low of 73.46 against the dollar. On Wednesday, the rupee pared some of its losses from the previous day but continued trading below the 73 level, ending FY21 with gain of 3.3 per cent against the dollar.

 

Two days ago, the rupee was the best performer among its emerging markets peers and had been the only currency reflecting a positive return on a year-to-date (YTD) basis. The up-move was supported by strong foreign portfolio investor (FPI) inflows into equity markets as well as a possible pause in the Reserve Bank of India’s dollar-buying spree in the quarter.

 

A report by IFA Global said the nationalised banks were persistently on the bid, likely on behalf of the Reserve Bank of India. ‘Correcting recent rupee over-valuation, especially against the yuan, and securing a higher USD/INR rate as on financial year-end could possibly have been the twin motives of the central bank. The up-move further triggered the unwinding of short USD/INR carry positions.’ the report said.

RBI dollar-buying spree

 

The central bank continued to shore up its forex reserves till early 2021 following which India’s forex reserves touched a record high of $590.185 billion by the end of January, according to Bloomberg data. Later, however, the forex reserves figure stagnated close to the $580-billion levels.

 

Experts pointed out that the RBI is likely to have stopped buying dollars in the spot market over the last two months and this could have provided a boost to the currency, especially at a time when foreign investors were buying into equities.

 

Anindya Banerjee, Vice-President at Kotak Securities, confirms that the central bank may have intervened and purchased close to $160 billion between June 2020 and February 2021, via spot, futures, and forwards which he believes could be a record level of intervention. “As long as the intervention was via the spot market, it was effective. However, once the RBI switched to forwards, it caused the forward premium to rise, thereby incentivising carry trade in a huge way,” he added.

 

Strong inflows from FPIs have also contributed to the rise in rupee over the last few months. Since January, FPIs have infused over $7 billion on a net basis into Indian equity markets although they have been net sellers in the bond market to the tune of over $2 billion.

The way forward

 

The significant fund flows into Indian equities over the last two months may not continue for long and that could have an impact on the currency.

 

MS Gopikrishnan, independent market expert, said usually the last quarter of the fiscal year is the best one for rupee from a trade deficit point of view. “We are just crossing that period and also entering a period of uncertainties in FPI flows on the back of higher US rates; these factors can put pressure on the rupee against the dollar. I expect the pair to move towards 74 in the coming weeks,” Gopikrishnan said.

 

Source: https://www.thehindubusinessline.com/

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