These ensured a much-awaited trend reversal in overseas fund flows and helped the local currency climb to a spot among the top three emerging market (EM) currencies against the US dollar last month.
India stands out for its growth prospects amid no visible signs of either a stagflation, or material fiscal breach, finance minister Nirmala Sitharaman said.
Inflows a Big Boost
This gives global investors the confidence they need to buy into local assets that promise higher relative returns due to the likelihood of a stable currency.
“India, unlike many other countries, is not pitching its currency at a level extraneously,” Sitharaman told the Upper House on Tuesday. “There is no collapse of the rupee. The performance of the Indian rupee is much better than that of the peers. Its fluctuations are more versus the dollar.”
The rupee had hit a lifetime low of 80.06 on July 21 amid a bout of dollar outflows and an unusual surge in the Dollar Index, which maps the relative strength or weakness of the US currency against a basket of other units. But since the surprising European Central Bank move to lift borrowing costs for the first time in a decade, and the second outsized increase in the Federal Funds rate in the US, both crude oil prices and the US dollar have weakened. Oil has retreated about 6% in the past few days, while the Dollar Index has shed about 1% since the US Federal Reserve raised rates last week.
The rupee gained about 0.40% on Tuesday to close at 78.72, its highest since June 28, Bloomberg data shows. The rupee is now one of the best performing in emerging markets over the past month, trailing just two Latin American monetary units against the dollar. Since June-end, the rupee has risen by a third of a percentage point.
During the day’s trading, three large foreign banks were seen selling dollars and the exercise, dealers said, was linked to the proposed capital infusion into a private bank.
has said it will raise about $1.1 billion from global private equity funds Carlyle Group and Advent.
The biggest boost to the rupee has come in the shape of fund inflows into financial assets. Foreign portfolio investors have net bought more than $1 billion in local equities and debt securities since July, data from NSDL showed, reversing the monthly outflow trend seen since November last year.
FII Shopping Spree
“The return of foreign flows has led to a demand for rupees,” said B Prasanna, head of global markets,
. “Exporters who were waiting on the sidelines for better levels to sell have also started covering their positions once the reversal began, thus aiding the sentiment further.”
Experts believe that the pressure on the rupee has eased, and inflows of overseas funds should ensure stability for the unit.
“A combination of factors, including the lower Dollar Index, low oil prices, positive overseas fund flows and dollar sales by exporters, has triggered gains in the rupee,” said Bhaskar Panda, executive vice-president,
. “While the appreciation trend may not sustain and will depend on fundamentals, the worst is over for now. India’s fundamentals are also at play, lifting investor confidence.”
Earlier, the Reserve Bank of India (RBI) reportedly intervened in the currency markets to prevent wild swings in the rupee and mitigate the impact of imported inflation. “The interventions which are happening from the RBI side are more for containing volatility,” the finance minister said.
India’s forex reserves were at $571.56 billion as on July 22, versus $642.453 billion at their peak in September last year. “We are still comfortably placed. (The rupee) is actually finding its natural course,” said the finance minister.
