Indian rupee logs over 4% gain this fiscal amid headwinds on economic front

The Indian rupee has logged over 4 per cent gain so far this fiscal, as sustained foreign fund inflows and the RBI's deft policy manoeuvring ensured a strong year for the Indian currency despite headwinds on the economic front, according to experts.

The local unit is likely to average around 73.50-74 in the financial year 2021-22, as despite a vaccine, the coronavirus hysteria still persists and may continue to grapple the foreign exchange market, experts said.

The financial year 2020-21 has been a roller-coaster ride for the rupee due to Covid-19. The pandemic-induced massive sell-off in the equity market led the rupee breach record low of 76.90.

However, the optimism over vaccines, easing of lockdown restrictions, infusion of stimulus by governments and central banks all over the world enthused investors with a general sense of optimism, and the rupee vaulted back to the 72 zone.

Read: Amid surge in Covid-19 cases, RBI likely to maintain status quo

HDFC Securities Deputy Head (Retail Research) Devarsh Vakil said, "Despite headwinds on the economic front and larger-than-anticipated fiscal deficit, the RBI's deft manoeuvring ensured lower yields for the G-secs and substantial accretion to forex (foreign exchange) reserves this year."

He added that the rupee is up by 4 per cent against the US dollar for FY21 despite having much higher interest rates and inflation than the US.

Experts said sustained foreign fund inflows into India's listed stocks ensured a strong year for the Indian currency.

For the current financial year, foreign investors have poured in USD 35.22 billion, the biggest inflows after 2014-15. India has attracted the highest-ever foreign direct investment (FDI) inflows at USD 67.54 billion during the first nine months of the financial year 2020-21.

Reliance Securities Senior Research Analyst Sriram Iyer, "The rupee movements were not surprising as Indian central bank took steps to stem the depreciation bias of the currency through monetary policy and intervening in the forex markets."

The rupee was also supported amid huge inflows into the domestic equity markets, he added.

Rising Covid-19 cases in India and across the world is a major cause of concern for the rupee. But, along with that, the factor that will dictate the trend for the rupee is taper tantrum, experts said.

"The Federal Reserve interest rate hike and US tax hike are the major challenges.

"In our view, Fed won't hike rates this year but it will indicate a slow and steady tapering of asset purchases before the end of the year, possibly involving a twist which may keep all emerging market currencies including rupee under check," Gupta said.

Also, US-China cold war, pick-up in global crude oil prices, increase in India's imports compared to exports and fears of current account falling into deficit, may also put pressure on the rupee.

Emkay Global Financial Services Head of Research (Currency) Rahul Gupta said, "The worst of the pandemic is behind us, and the risk appetite is taking a significant stride higher but global and local idiosyncrasies will continue to weigh on the Indian rupee for some more time, at least till the time coronavirus is not contained."

Also, the RBI would cap the rupee from appreciating sharply because of export competitiveness. "So, the outlook for FY22 will be sideways, and we expect the rupee to see-saw within 70-76, averaging around the 73.50-74 zone," Gupta said.

In the short-term, the ongoing global risk-off sentiment will weigh on sentiments.

However, strengthening of oil prices which could see twin deficits in the form of current account and fiscal account will weigh on the currency.

"We expect the currency will be averaging anywhere between 74.50-75 a dollar in the first half FY21-22 amid ongoing global risk-off sentiment," Iyer said.

He added that the long-term weakening trajectory against the dollar will continue as it has weakened over since 2015. "We could see the Indian rupee touch the 76-77 a dollar mark in the second half of FY21-22."

Experts believe that pick-up in global growth and strong vaccine roll-outs will keep the risk appetite higher. Besides, the speed at which economic activities recover, India's entry into global bond indices, global risk appetite (FDI and flows into equities) will determine the fate of the currency this year.