Rupee takes northward trajectory this fiscal; volatility likely amid Covid blues: Experts

Shrugging off pandemic-induced economic woes, the Indian rupee has witnessed significant appreciation in the first two months of the current fiscal as dovish stance by the US Federal Reserve and other raft of factors steered the currency's overall positive trajectory, according to experts.

Apart from relatively easy money approach of the US Federal Reserve, less aggressive intervention by the Reserve Bank of India (RBI) in forex market helped the rupee also emerge as the top-performing Asian currency in May, they opined.

Going ahead, analysts said, the USD-INR spot is likely to remain volatile amid a slew of events like next month's major central banks' monetary policy decisions, hopes of plateauing Covid curve, rollout of vaccination programmes and expectations of a possible stimulus package by the Indian government to boost domestic economic activities.

Dovish stance from RBI when they meet for monetary policy decision on June 4, and a fiscal package from the government are expected to support growth and support the currency," Devarsh Vakil, Deputy Head of Retail Research at HDFC Securities, said.

Noting that the bias for rupee remains on the bullish side, he said, "we expect rupee to head towards 72 odd levels in the near term".

Forex traders cautioned that the coronavirus risk still persists and a lot will depend on aggressive rollouts of the vaccination programme. Moreover, the impact of the second Covid wave on the first quarter of FY21 will also weigh on investor sentiments.

"Investors will also watch out for the vaccination programmes and aggressive rollouts will help the domestic economy. If not, then the economic recovery could be slow. In turn, this could weigh on the local currency which could again depreciate towards 74.00 levels," Sriram Iyer, Senior Research Analyst at Reliance Securities, said.

In April, the Indian rupee witnessed a small depreciation due to FPI outflows from the equity markets. Additionally, a resurgence of a Covid second wave intensified worries that an economic recovery may be delayed.

However, in May, the rupee became Asia's top-performing currency. For the current fiscal year, the rupee has appreciated around a percentage point (0.92 per cent).

Registering gains for the third straight day, the rupee rose 15 paise to close at 72.45 against the US dollar on May 28 (Friday). This month has only one more trading day on May 31 (Monday).

According to Iyer, the currency could appreciate initially supported by FPI flows and lack of intervention from RBI.

"So, initially, we could see the rupee test 72.00 levels. This will definitely help importers especially oil imports which could help reduce the twin deficits. At the same time, exporters could feel the heat, so RBI could enter at a certain point to cap appreciation," Iyer said.

Markets will also be looking for cues from RBI's monetary policy next week and the Federal Reserve' policy in mid-June.

Rahul Gupta, Head Of Research-Currency at Emkay Global Financial Services, believes that although Covid cases are plateauing, regional lockdowns have created a sense of worry that it may again take a toll on the economic growth.

He also pointed out that due to the second Covid wave in India and regional lockdowns, the IPOs of nearly nine companies have been postponed for the later months.

"So, to keep the ball rolling, Modi government may come up with a stimulus package, which will be rupee positive. Technically, a broad trading range would be 71.50-73.50," Gupta said.

India's foreign exchange reserves touched a record high of USD 592.894 billion for the week ended May 21, boosted by gold and currency assets. The previous all-time high for the forex kitty was USD 590.185 billion for the week ended January 29, 2021.