Indian rupee in the volatile territory; may fall back on strong forex reserve

The Indian rupee has seen ups and downs over the recent few days. The currency gained 11 paise to touch 74.31 against the US dollar in the early hours of trade on Friday. The rupee had opened at 74. 41 on Friday morning, while in the previous session of trade, it had settled at 74.42 against the dollar. In the early hours of trade on Thursday, the rupee had fallen six paise against the US dollar to touch 74.44.

In early hours on Friday, the dollar index, which is a measure of the US dollar’s strength in comparison with six other currencies, was trading at 96.21. The six currencies that are used to gauge the strength of the US dollar include the Canadian dollar, Euro, Krona, Yen, Franc, and the Pound. Although the rupee is not part of this set of six currencies, any change in the dollar index impacts the Indian rupee. When the dollar index rises, the Indian rupee drops and vice-versa. If the dollar index is on the rise, the returns for foreign institutional investors drop. On the other hand, when the dollar index drops, the FIIs gain in terms of returns.

Why has the rupee seen depreciation?

According to analysts, the reason for the pressure on the rupee could be attributed to the rising concerns over the widely spreading new variant, Omicron, and its effect on economic revival. Although there have been no national lockdowns, different states have imposed curbs. However, it is yet to be seen if the new wave is a shortish one, in which case, experts note that the impact on economic revival may not be as severe as the previous waves.

The rupee depreciated on Thursday, amidst the news that the US Federal Reserve is likely to hike interest rates. According to reports citing the mid-December meeting of the US central bank, the Fed Reserve could begin its increase in interest rates as early as March in a bid to curb rising inflation. Also, on Thursday, the US dollar gained 0.15 percent over the Fed’s likelihood of raising interest rates. A surge in the prices of crude oil is also likely to depreciate the rupee further, as per experts. Reports show that Brent crude futures went up to touch $82.52 per barrel, an increase of 0.65 percent on Thursday.

It may be recalled that foreign institutional investors (FIIs) have taken a cautious stance over the last quarter of the previous year. Reportedly, FII inflow was down 84 percent against the Rs 1.70 crore inflow in 2020. The Indian rupee ended the year 2021 as the currency that has been worst-performing in Asia, over FII selling. The Indian currency dropped 2.2 percent in the last quarter, according to reports, as overseas funds withdrew $4 billion out of the markets.

However, as per the Reserve Bank of India’s updates from December 2021, India’s foreign exchange reserve stood at $635.08 billion, which is expected to offer the Indian rupee protection from depreciation. Reportedly, India’s forex reserve is the fourth highest in the world.

Conclusion

Even as the news of the US Federal Reserve minutes hinting at a faster interest rate hike came in, the Indian rupee dropped versus the dollar on Thursday. However, in the early hours of trade on Friday, the rupee had made some slim gains as the US dollar index saw a slight fall. The rupee has been seeing some ups and downs but has been largely protected by the foreign exchange reserves that India has.

Source: MoneyControl

FAQs

What is the US dollar index?

The US dollar index is a gauge of the US dollar’s value vis-a-vis six other currencies including the Pound, Canadian dollar, Krona, Franc, Euro, and Yen.

What is the relationship between the Indian rupee and the US dollar index?

Although the Indian rupee is not among the set of six currencies against which the dollar’s value is measured, when the US dollar index falls, the Indian rupee gains and vice-versa.

What does a rise in the dollar index mean for FII inflows?

Every time the US dollar drops against the Indian rupee, foreign institutional investors gain greater returns on their investments which are in dollars, and vice-versa.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.