A lot has changed in one week and it feels like history is repeating itself. After trading in a lacklustre zone, the Indian rupee suddenly depreciated to 75.32, a level last seen in June 2020. Since the beginning of this year, the rupee has weakened nearly 3.1 percent. Usually exogenous factors flash red for the rupee but this time it’s different. The main reason for the Indian currency’s vulnerability is the second wave of coronavirus and the Reserve Bank of India’s G-Sec Acquisition Programme 1.0 (GSAP) to underpin India’s fragile economy.
In its April monetary policy, the central bank maintained the “accommodative stance” and announced a Rs 1-lakh crore bond-buying plan to keep a lid on long-term interest rates to combat the impact of the COVID-19 pandemic. This primary rupee liquidity exerted pressure on the Indian currency and will continue for some more time.
Further muddying the waters, India’s COVID-19 cases continue to spiral and are rapidly spreading geographically. The virus has, so far, infected more than 13.57 crore people and caused around 29.32 lakh deaths globally.
Also read: Explained | Rupee plunges below 75 per US dollar. What’s behind the currency’s fall?
India recorded its biggest single-day spike with 184,372 fresh cases reported in the last 24 hours, pushing the country’s COVID-19 tally to 13,873,825 cases, health ministry data update on April 14 said.
Another negative for the rupee is that India has banned vaccine exports because of the surge in COVID-19 cases in the country. Lockdown fears have kept the forex traders on the edge.
On the global front, the dollar index, Asian currencies, crude oil and US treasury yields have been pretty subdued since the beginning of April but the focus is on this week’s US inflation data.
The US Federal Reserve has been dovish and has said it is in no rush to change the status quo. Fed policy-makers believe that inflation will remain moderate but in our view, the pandemic-related scarring and supply constraints will keep prices elevated for some more time. The dollar and US treasury yield will trade with a strong footing if inflation figures are better than market expectations.
So, what next? Will this coronavirus hysteria persist and continue to roil the foreign exchange market and the rupee? Or, will the Fed rate hike fears will activate the dollar bulls further?
Foreign institutional investors (FIIs) have already been net sellers of local stocks and debt in April. They have sold $ 186 million worth of equity and $ 183 million worth of debt. At this point, the future of the rupee looks gloomy as it is not the only currency that has plunged since the start of 2021. It is also followed by the Russian ruble (4.76 percent), Korean won (3.69 percent), Turkish lira (9.8 percent), Indonesian rupiah (3.92 percent).
Will the RBI intervene in the forex market to limit any further depreciation? India’s forex reserves stand at $ 576.86 billion and are enough to cover nearly 18-months of imports, so the central bank can afford to sell dollars.
In our view, the RBI will continue its asymmetric intervention of limiting the volatility but won’t cap any levels. Currently, the USDINR spot is trading at around 75 zone. The USDINR one-month ATM Implied volatility has increased to 6.6 percent from 5.5 percent observed on April 1. So the crucial resistance in USDINR spot lies around 75.20-75.25, above which the next resistance is at 75.40-75.60 in the short term. Strong support is at 74.75 and only consistent trading below 74.75 will push spot prices towards 74.50-74.25-74.15.
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