Rupee could see a downside in the short term

Tracking currency

Analysts tracking the Indian rupee expect the currency to be volatile in the short, and medium-term. They see the rupee touching 73.25 in the short term and 74.25 in the medium term, after witnessing a stable run recently.

While they feel that IPOs on the horizon could keep the rupee up, the fall will be gradual and will likely be witnessed on the back of higher risk appetite and lack of RBI intervention.

“Next month, there are major central banks’ monetary policies, which will induce some volatility in the rupee. The focus remains on US non-farm payroll data and then Fed policy,” says Rahul Gupta, Head of Research- Currency, Emkay Global Financial Services.

“Chairman Powell has repeatedly stated that any monetary policy change would be communicated well in advance and there are expectations that the interest rate trajectory will come around through the Jackson Hole Fed conference and the September FOMC meeting.”

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“But until then, any upbeat US economic data and suspect of hawkish remarks will keep the rupee volatile.”

Among the factors that could lead to the depreciation of the rupee are RBI intervention in spot and futures markets and strengthening of oil prices, say experts.

“To promote exports, the RBI could be actively intervening in the spot and futures markets which could limit appreciation bias. So, we could move back up to the 73.00 to 73.25 levels,” says Sriram Iyer, Senior Research Analyst, Reliance Securities.

“Additionally, in the medium term, strengthening of oil prices could see current account and fiscal account deficits swell and will weigh on the currency. So, the Rupee could test 74.00-74.25 level.”

Iyer adds that the rupee has recently seen an upward trend on the back of weak dollar, strong equities, and the feeling that the second wave of the pandemic has peaked.

The US Dollar has tumbled over the past few weeks as the reiteration of accommodative monetary policy stance despite rising inflation fears, Iyer added.

He feels that in the short term, the rupee due to a weaker dollar could witness a move towards 72.50-72.25 and that the Fed will start to think about the withdrawal only at the beginning of 2022 due to uneven recovery of the economy.

Analysts point out that though RBI not intervening is a positive for the Indian currency, it is unlikely that the central bank will not intervene. “RBI could not be too lenient with Rupee as competitiveness against peer emerging market could hit trade balance and thus James Bond kind of intervention from RBI has awaited around 72.50-60 levels,” says Amit Pabari from CR Forex Advisors.

“We expect the Indian rupee should pare some gains on the importer’s rush to cover the lower spot and likely RBI’s intervention around 72.50-60 levels. However, momentum above 73.05 and 73.20 will only lead to a reversal in the bearish trend.”

At the end of Friday’s trading, the Indian currency ended at 72.45 to the dollar. The rupee had gained for the third session in the week, and for the fifth week in a row. Along with the rupee, Indian equity markets have also seen good momentum with the Nifty index touching a new high, ending at 15,435.65 at the end of trading hours on Friday.