Rising commodity prices, FII outflows to keep rupee subdued
New Delhi, March 13: High commodity prices as well as outflow of foreign funds from equity markets combined with the Russia-Ukraine war are expected to keep the Indian rupee subdued in the short to medium term. The trend is expected to widen India's current account deficit to over $20 billion in Q3FY22 from $9.6 billion in Q2FY22.
At present, the crisis has led to a global spike in international prices of crude oil, natural gas, coal, nickel, copper, aluminium, titanium and palladium. Moreover, India is a major importer of these precious as well as industrial commodities.
Furthermore, the spike in commodities' costs is expected to trigger an inflationary trend and ultimately a reversal in monetary policy. This will further accelerate FIIs' selling in the Indian equity market. "Rupee is expected to remain weak. However, de-escalation in the crisis shall be positive for the rupee," said Sajal Gupta, Head, Forex and Rates, at Edelweiss Securities.
"In India, FPIs have sold almost $13 billion this year itself, which has added pressure on the rupee." On last Friday, the rupee closed at 76.5950 to a USD. Just a few days ago, the rupee had hit its record low at 77 to a greenback. However, interventions by the Reserve Bank might cap the downside to rupee against the USD.
The RBI is known to enter the markets via intermediaries to either sell or buy US dollars to keep the rupee in a stable orbit. "We expect that volatility in the rupee could continue to remain elevated but this could be curtailed by the RBI by active intervention," said Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services.
"With the above factors in consideration, we can see that the overall bias as such for the rupee is towards depreciation against the US dollar and expect that dips 75.80 and 75.40 for the USDINR (Spot) pair could be used as a buying opportunity for targeting towards 77.70 and 78 levels. The view could be negated only if the pair closes below 74.70 levels."