Revival in FPI inflows likely to ease pressure on rupee

The regained stability in the domestic markets after the announcement of general election results and revival in foreign portfolio investors (FPI) flows are expected to reverse the downward pressure on the rupee in the near term, according to a report by Bank of Baroda’s economic research department. The Indian rupee (INR) closed 2 paise lower at 83.5550 against the U.S. dollar (USD) on Friday, as intervention from the Reserve Bank of India (RBI) prevented the local currency from staying above its record low of 83.5750 touched in April this year.

“In the next fortnight, we expect INR to strengthen, in the wake of renewed FPI inflows, with an expected trading range of 83.3-83.6 per dollar. Weakness in US$ is also expected as investors price more than expected rate cuts in CY25,” says BoB Economist Sonal Badhan in a report.

The Indian rupee faced significant volatility in the first fortnight of the current month, depreciating by 0.1% to trade near its record low of 83.57 versus the USD. Multiple factors impacted the rupee such as volatility in the domestic market post Lok Sabha election results, strengthening of the U.S. dollar, FPI outflows, and rise in oil prices. As a result, INR traded in the range of 83.15-83.57 during the period.

As of June 14, INR, in sync with most global currencies, fell against the dollar, declining by 0.1%, hovering near its lifetime low levels. Even emerging market (EM) currencies depreciated by 0.1%, as oil prices began to inch up towards the end of this fortnight. Brent has risen by 1.2% as of June 14, compared with the end of the previous month, while oil prices are up by 6.6% against early Jun’24.

Besides, FPI outflows had also been maintaining pressure on the currency, and outflows were seen during most of early Jun’24. Only towards the end of the fortnight, when there was more clarity on the general election results, the tide changed. As of June 14, 2024, FPI inflows stood at $57 million, compared with $1.5 billion of outflows recorded in May’24. The dip in the U.S. 10-year yield is also helping flows move toward India.

As per the BoB Economist, the dollar is likely to weaken in the coming fortnight as market participants digested the latest macro prints from the U.S. and readjusted their rate cut expectations. However, renewed volatility in oil prices will add to depreciation pressure on INR.

On balance, the BoB report expects INR to trade in the range of 83.3-83.6 in June, citing that India’s forex reserves ($655.8 billion) give the RBI more than ample buffer to see through the volatility.

In the next fortnight (as of June 14), major global currencies depreciated against the dollar as the U.S. currency regained momentum amid Federal Reserve’s continued narrative of ‘higher for longer’ rate scenario. The DXY index, measuring the dollar’s value against a basket of currencies, is 0.8% higher in Jun’24, reversing the 1.5% loss it made last month.

As per the latest Fed policy projections, the U.S. central bank expects growth to hold ground (2.1% in CY24) and PCE (Personal Consumption Expenditures) inflation, a measure of the average increase in prices for all domestic personal consumption, to settle at 2.6% versus 2.4% estimated earlier. The Dot plot also indicates that the members are looking at 1 rate cut this year. Apart from this, weakness in other currencies such as EURO and Japanese yen also supported dollar demand, BoB says in its report.

Ongoing political uncertainty in Europe (European parliamentary elections and snap elections in France), has pulled EUR down by more than 1%. In the case of Yen, the report notes that no change in the stance by BoJ and deferred plans to announce the details of winding up of its bond purchase program impacted market sentiments.

Jateen Trivedi, VP Research Analyst - Commodity and Currency, LKP Securities says that the rupee remained resilient against the dollar despite volatility in the dollar index due to the CPI data and the Fed's policy decision. “The trend for the rupee will likely remain range-bound, but the undertone remains weak as it consolidates near its all-time low. A significant drop in the dollar below $103 would be necessary to trigger strong rupee buying above 83.00. Until then, the rupee is expected to trade within the range of approximately 83.20-83.75," says Trivedi. 

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