Indian rupee outperforms emerging market currencies

The Indian Rupee outperformed the other emerging market currencies, exhibiting a significant decrease in expected volatility during June. When investors look to profit off the interest rate differentials between two currencies, volatility becomes the crucial factor to take into account. Despite the fluctuation in the value of the dollar over the past month, the Indian Rupee remained consolidating within a narrow range of 81 to 83 due to the strong intervention of the Reserve Bank of India. 

According to the experts, the positive outlook for the Rupee can be attributed to several factors, including improved growth prospects, robust capital inflow, and declining oil prices. If the Chinese currency has experienced a depreciation of 5%, while the Indian Rupees have also weakened by 2%, then comparatively, the Indian currency can be considered as better performing. 

The strength of the Indian Rupee is attributed to several factors such as significant foreign currency exchange reserves, a robust growth trajectory, and low inflation. These factors contribute to the stability of the currency, indicating effective management by the RBI. 

Some economists observed that the Indian rupee remained within a narrow range of 81-83 due to active intervention by the Reserve Bank of India, regardless of the performance of the US dollar in the previous month. They further projected that the rupee is likely to continue trading within the 81-83 range by the end of FY24. This positive outlook is influenced by factors such as an improving current account deficit (CAD), favourable capital inflows, declining oil prices, and positive real interest rates, which collectively contribute to a positive bias for the rupee. 

FPI flows surged to USD 5.8 billion in May, marking the highest level in nine months, and this positive trend has continued into June. The Indian rupee has remained within a narrow range of Rs 81-83 since late 2022 primarily due to active intervention by the Reserve Bank of India. 

Various economists believed that the depreciation of the Chinese Renminbi, resulting from rate cuts implemented by the People’s Bank of China, may exert pressure on the Indian Rupee. This pressure arises from the need for the rupee to remain competitive in terms of export pricing. Additionally, a decrease in the value of the Renminbi compared to the rupee could make imports from China more appealing widening India’s trade deficit with China. 

The Rupee has shown a limited response to the decline of the US dollar due to the intervention carried out by the Reserve Bank of India in both spot and forward markets. The active involvement of the RBI has helped to mitigate the impact on the Rupee. 

The expectations of the Monetary Policy Committee indicating a prolonged pause in interest rate adjustments, in contrast to the likelihood of another rate hike by the US Federal Reserve, are influencing the movements in the currency pair between the rupee and the US dollar. The RBI has shown a preference for maintaining a relatively stable range for the Rupee. This suggests that as foreign institutional investor flows improve, the RBI may continue to build reserves. 

It is anticipated that the RBI to continue accumulating reserves to strengthen its buffers. The dollar-rupee exchange rate may continue to remain range-bound within the Rs 81-83 range.