The rupee has recorded a stellar comeback, strengthening nearly 177 paise against the US dollar in just two sessions after the RBI announced several measures to protect the falling Indian currency, although analysts highlight that the gains may be temporary amid strong macro headwinds.
The rupee jumped 82 paise on Tuesday to 94.06 against the US dollar in early trade on Tuesday. Overall, the Indian currency has gained around Rs 1.77 against the US dollar in two sessions from Friday's closing level of 96.73.
The Reserve Bank of India (RBI) on Saturday announced four measures, including a dedicated dollar supply window for three state-run oil companies, tighter restrictions on foreign exchange derivatives, a 20% cash reserve requirement for certain currency contracts and stricter daily cash reserve requirements for banks.
Also read | Rupee stages stunning comeback against dollar: What’s the RBI’s 4-step shock therapy and how long can it last?
Later on Monday, RBI tightened rules on rupee non-deliverable derivative contracts, limiting overseas clients to using them only for hedging, and widened a 20% cash reserve requirement to banks' own rupee currency hedges.
What lies ahead for rupee?
RBI's latest moves are expected to reduce pressure on the spot market and curb speculative dollar buying, supporting the currency in the near term, said Jateen Trivedi, VP Research Analyst of Commodity and Currency at LKP Securities. "With the RBI's measures supporting the rupee, we expect USD/INR to move towards 95.00-94.80 range in the near term," PTI quoted CR Forex Advisors MD Amit Pabari as saying.
The announcements made by the RBI over the weekend clearly reflect its intent to drain excess liquidity from the system, while the timing may be read by the market as a tolerance level for Rs 97 that the regulator intends to defend, JM Financial said. It now expects the rupee to appreciate to 94-94.5 per US dollar in the near term before heading towards 97-97.5. "But we see upside risk to our earlier expectations of 7.5% levels on domestic yields."
Trivedi from LKP Securities however warned that a sustained recovery will depend on FII flows, crude oil prices and broader dollar movement. This comes as FIIs continue to remain bearish on Indian markets, heavily selling Indian equities while oil prices and bond yields continue to soar and spook investors.
Also read | RBI tightens rules on rupee non-deliverable contracts, widens 20% cash reserve requirement
"If these exogenous factors persist for long, exerting pressure on the capital account, the government should start evaluating fiscal measures to attract FII flows," JM Financial said, adding that if crude price spikes incrementally or even remain at current levels for long, then all emerging market currencies including the rupee could come under pressure.
Although these steps will be effective in draining excess liquidity, JM Financial said that the impact on the rupee seems temporary as they are not effective on macro challenges such as elevated crude oil and FII selling.
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Disclaimer: This article has been written by Debaroti Adhikary, who is not a SEBI-registered Research Analyst or an Investment Adviser. Debaroti Adhikary and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.
