1. Foreign capital flows.
2. RBI intervention.
3. Carry trade.
1. Foreign capital flows:
Between January and June of this year, FPI were heavy sellers in the equity and debt segment and as a result, the Reserve Bank of India (RBI) had to intervene aggressively to keep the Rupee stable.
In spite of the aggressive intervention, Rupee could become a median performer when ranked against a basket of 26 currencies, with a 6 per cent depreciation against the US Dollar.
Whereas, post-June, there has been a U-turn in the FPI flows and that has helped Rupee to become an outperformer.
Between January and June of this year, FPI were heavy sellers in the equity and debt segment and as a result, RBI had to intervene aggressively to keep the Rupee stable.
In spite of the aggressive intervention, Rupee could become a median performer when ranked against a basket of 26 currencies, with 6% depreciation against the US Dollar.
Whereas, post June, there has been a U-turn in the FPI flows and that has helped Rupee to become an outperformer.
1. RBI intervention:
RBI targets two aspects of the Rupee:
(i) Volatility should be low.
(ii) Indian Rupee should not become an outlier.
RBI achieves these objectives by buying USD when the US Dollar is weaker and selling them when they are stronger. Between May 2020 and September 2021, when the USD was weakening, RBI bought around $158 billion in spot and onshore forwards.
This does not include the buying that they would have done on exchanges as well on the non-deliverable Forward (NDF) market. This year, RBI had the opportunity to utilise around $41 billion till June to defend Rupee.
RBI has achieved its objectives very well as Rupee has remained an outperformer year till date and on volatility score as well, we have done quite well.
2. Carry trade:
Carry trade is a major strategy employed by retail and institutional speculators to bet on currencies with higher interest rates v/s currencies with lower interest rates.
In a carry trade, traders would sell USD and buy Rupee in forwards or futures and then roll them on expiry to earn both, roll return as well as the expected appreciation of Rupee in spot.
These are highly leveraged bets and tend to amplify the impact of flows in the Rupee. Speculators like to bet on currencies where growth prospects are higher, the political climate is stable, and the global risk environment is favourable.
Trouble occurs when these assumptions are challenged. Between mid-2020 and the end of 2021, carry traders amassed large short bets on USDINR as the risk environment was strong.
However, this year, they were forced to unwind as oil surged, the dollar index touched multi-decade highs and equity markets tanked.
The macroeconomic story remains strong for India and in spite of the global economic slowdown and recession in large parts of Europe and also in China, the Indian economy should continue to clock growth closer to 7% GDP for FY23.
Unlike the inflation problems in several EM and DM economies, in India, inflation has not become a problem.
Political stability and attractiveness of the Indian economy as an investment destination for foreigners can continue to drive structural flows into the country via FDI and ECB.
Even though the global situation remains challenging but lower oil prices, falling inflation, and India emerging as an attractive destination can bring in both structural flows and also hot money, which can keep the Rupee stable.
Price action remains bullish on USDINR but upside momentum is stalling. As long as prices sustain above 79.20 levels on spot, bias is upwards and one can employ various bullish to rangebound strategies using options.
The upside, for the time being, remains capped near 80.10/30 zone on spot. Nevertheless, in case of a breakdown below 79.20, upside bias will be damaged and a downward trend will be confirmed.
(The author is VP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities Ltd.)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)