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Rupee falls over 2% against US dollar YTD; Q4 results, assembly elections may fuel volatility in INR

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Apart from RBI’s activeness more in bond and now less in FX, other economic and political events could drive momentum in Rupee

By Amit Pabari

When expectation doesn’t meet reality then the market reacts unexpectedly. The same happened this week when RBI came up against the market’s hawkish tone expectation as given below.

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*Although RBI kept interest rates unchanged at 4% and Reverse repo at 3.35%, they confirmed to keep policy stance “accommodative” as long as recovery will be promising.
*RBI announced buying INR 25 crore on 15th April and total INR 1 trillion ($14 billion) government bonds for this quarter
*Extension of the TLTRO program by another 6 months to Sep 20, 2021 to keep borrowing cost low and support the government fiscal plan for economic recovery.

The Rupee traders & hedgers should surely keep in mind below factual descriptions before taking a call.

Carrying carry trade will not be feasible anymore

Till mid-March, Rupee was on a stronger foot against its peers with a positive return for 2021. Traders were attracted by stable currency outlook, RBI’s stronger FX reserves, kitty and elevated premiums. When Rupee was trading at its year high of 72.30 in mid-March, the 1 year premiums were at 5.43%.

The RBI’s plan will surely drag down carry over US treasuriesThe RBI’s plan will surely drag down carry over US treasuriesThe RBI’s plan will surely drag down carry over US treasuriesThe RBI’s plan will surely drag down carry over US treasuries

However, rising COVID cases in India to All-Time-High and financial year-end dollar demand from corporate created a double whammy effect. This took Rupee to trade at 73.50 from 72.50 in the last 2 trading days of the financial year 2021. And then RBI’s dovish monetary policy unable to please local FX traders as Rupee registered a fall of 1.50% to quote at 74.50 and yield to fall at 6.08%. The RBI’s plan will surely drag down carry over US treasuries. Story doesn’t end here as RBI’s action is diverging with few EM central banks like Turkey, Russia and Brazil. The lower carry will surely not help Rupee to outperform anymore.

Will RBI press the sell button at 75 if not at 74?

The FX reserves were seen topping near $590 billion in February, 2021. But Rupee was seen appreciating as much as 72.30 till mid-march. The RBI was seen absorbing all the dollar inflows and curbing Rupee’s gain to keep its competitiveness against other peers. The average rate of RBI’s FX reserves or forward purchases last year was much higher and hence it was expected that Rupee will depreciate to match RBI’s balance sheet asset valuation. Unfortunately, it didn’t come in March but it started moving toward those rates post RBI meet. And now Rupee is down by 2.28% for 2021 to trade at 74.70 levels. The intervention was seen even when Rupee was seen breaking crucial support of 73.70-74.00 zone. Neither, it was seen when it depreciated to as much as 74.90 (Composite rate) when Reuter’s glitch stopped all interbank trades on Thursday. A little sign of intervention was smelled on Friday when Rupee was seen jumping up to 74.70 in the final interbank hour from a morning low of 74.96. And hence, RBI could target Psychological “Platinum Jubilee” mark of 75.

Will other factors will add more fuel to the volatility in Rupee

Apart from RBI’s activeness more in bond and now less in FX, other economic and political events could drive momentum in Rupee. The corporate quarterly results will start publishing from Mid-April and will address actual performance of the economy during Q4 FY 21. The uncertain results on 2nd May for ongoing election in 4 states and 1 union territory will be closely eyed for the center’s political presence in states. Overall, apart from DXY & US yield move; domestic fundamentals will have a larger impact on local currency.


In nutshell, RBI is likely to manage bond market over the currency market to support the government’s INR 12 lac crore fiscal spending plans. This is likely to keep benchmark yield further below 6%. And hence, unwinding of carry trade on the back of lower interest rate differential, mounting inflation and weaker economic data could pressurize the Rupee. Furthermore, rebound in DXY and recovery in the US yield on back of risk-on or off trades will support demand for the US dollar in the upcoming months. Technically, the USDINR pair had given breakout from a downward slopping trendline and made first higher high above 73.70 levels. And hence, 73.50 to 73.70 zone is unlikely to break on a weekly closing basis and any retracement towards that level will be a buying opportunity for a higher target of 75.20-75.40 levels over the next 1.5 months.

(Amit Pabari is managing director at CR Forex Advisors. The views expressed are the author’s own.)

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