RBI intent is key to curb further rupee weakness’

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Context

The rupee’s near-term fortunes may directly be influenced by the Reserve Bank of India’s intent on preventing any further depreciation in the currency as the surge in COVID-19 cases hits jobs and growth.

Growth rates seems to be promising 

  • The rupee has already lost 2.6% against the dollar so far this month, putting it on the cusp of marking its worst month since the pandemic hit the country early last year.
  • INR [Indian rupee] is likely to trade with a depreciating bias on the back of a stronger dollar, relatively weaker [emerging market or EM] currencies, muted EM inflows and rising COVID-19 cases in India.
  • A fortnightly Reuters poll showed bearish bets on the rupee climbed to their highest since last April, as the surge in infections has halted what had been seen as a promising growth story in the region.

‘Forecast is for 74.50-76’

  • The rupee closed at 75.01 to the dollar, and traders said they expect it to stay in the 74.50 to 76.00 range against the greenback in the near term.
  • India reported 3,32,730 new daily cases, the highest single-day tally anywhere globally.
  • Rising cases have been one of the main factors behind the recent fall in the rupee, but the RBI’s decision to commit to large bond purchases has added to downside momentum.
  • The RBI has committed to buying ₹1 trillion worth of bonds in the April-June period in its effort to temper the rise in bond yields to help the government borrow its budgeted ₹12.06 trillion from the market at low-interest rates.
  • It would do more going forward, and this would be alongside its regular open market bond purchases and special open market operations - the simultaneous sale and purchase of government securities over different tenors - the equivalent of the U.S. Operation Twist.
RBI keeps key policy rates unchanged - The Hindu
  • Economists also believe the RBI’s policy priority of keeping a lid on G-sec (government bond) yields is more pressing than arresting INR depreciation.
  • The road ahead for the rupee is likely to be complicated by rising inflation and faltering economic fundamentals.
  • The RBI has stressed it intervenes to smooth volatility in the forex market.
  • It aggressively bought dollars last year as investors flocked to India but economists are unsure if the intervention on the downside will be as strong.
  • A weaker rupee helps exports and the RBI may prefer it, said economists.
  • Negative real interest rates, potential GDP and earnings downgrades and rising inflation have also become headwinds.
  • The INR could continue to weaken in the absence of a strong anchor from the.

BIASA BASICS

Rupee weakened after RBI's G-SAP announcement

  •  The Indian rupee plunged soon after the Reserve Bank of India’s (RBI) announced its monetary policy.
  • The local currency fell 1.5 percent to 74.55 against the US dollar, witnessing biggest one-day drop seen since August 2019.
  •  Concerns over rising COVID-19 cases in the country and a dovish monetary policy by the central bank pressurised the rupee.
  •  The second wave of the Covid-19 pandemic has resurfaced concerns over the Indian economy and it is expected to see slow growth.
  •  Additionally, rising crude prices, weakening foreign fund inflows amid a strengthening dollar and rising US 10-year bond yields also impacted sentiments.

RBI’s announcements

  • On April 7, the RBI assured markets that it will purchase government securities (G-Sec) worth Rs 1 lakh crore in the first quarter of FY22 under G-SAP 1.0.
  •  The banking regulator added that the first auction under G-SAP aggregating Rs 25,000 crore will be held on April 15, 2021.
  •  Further, the Monetary Policy Committee (MPC) of the RBI also kept the repo rate (lending rate for commercial banks) unchanged at 4 percent.
  •  Similarly, the reverse repo rate was kept unchanged at 3.35 percent.

What initiated for the fall of the rupee?

  • The announcements of liquidity infusion into the market via the bond program set the rupee sliding, according to analysts.
  •  The loss in the rupee's strength made the Indian currency the worst performer in Asia.
  • Market analysts believe that the RBI stuck to a loose monetary policy to ensure liquidity in the market over the long term.
  •  The step has been taken to keep up the country's growth in the wake of rising cases of COVID-19.
  • Some also believe that the rupee fell sharply as the forex market wasn't expecting that the RBI would take such a 'dovish' (supporting low-interest rates and an expansionary monetary policy) stance.
  •  The Indian rupee has went on to witness steep depreciation towards five-month lows as rising Covid-19 cases in the country have created an atmosphere of lingering uncertainty, posing risks to an already fragile state of recovery.
  •  The RBI will continue to maintain the ultra-loose monetary policy and infuse liquidity for a long time as Covid surge will keep imparting uncertainty to growth outlook.
  •  The forex market wasn't expecting such a dovish stance and rupee got set on fire.
  • The resistance in USDINR spot have become support as RBI intervention was missing.

Is the fall good?

  •  While a fall in the rupee will make India's exports cheaper and thereby, competitive, it also makes the country's imports expensive.
  •  However, the export gains that come with the fall in the rupee’s strength depend on the global demand for Indian goods.
  •  According to experts, the rupee falling below the 75-mark isn’t considered good as it makes crude oil import too expensive for India.

 On a broader Outlook

  • Going ahead, the demand for domestic currency is likely to get hit amid pressures arising from the second wave of the virus. Analysts expect further depreciation in the rupee.
  •  Facing the hurdle at 72.20 mark, the domestic currency has reversed course in a rather steep manner and looks poised to witness further depreciation in coming days, even as sustained portfolio inflows are still underpinning the local unit.
  •  Going forward, the domestic currency has near term support pegged at 74.50, while it is expected to trickle down further on the downwards trajectory in case of any breach of the same.

SOURCE: THE HINDU 

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