One of the most stable currencies in Asia-Pacific this year, the Indian rupee (INR), stood at 73 against the US dollar (USD) in early September, hovering around its strongest level since mid-June.
Investors have dumped the greenback after US Federal Reserve Chair Jerome Powell last month laid out a slower-than-expected path to interest rate hikes and said the U.S. central bank is likely to begin withdrawing some of its easy-money policies before the end of the year.
The Reserve Bank of India (RBI) held interest rates at record-low levels during its August meeting, saying it was maintaining an accommodative monetary policy stance as long as necessary to support the economic recovery and to help mitigate the negative impact of COVID-19. Meanwhile, the RBI raised its inflation forecasts for FY22 to 5.7% from 5.1% previously while saying it would normalize liquidity conditions.
According to Gaurang Somaiya, a foreign-exchange analyst at Motilal Oswal, the rupee’s resilience has been primarily driven by consistent fund flows and Reserve Bank of India’s building up its foreign exchange reserves to near all-time highs.
“Fund flows have been one of the major reasons that helped the rupee gain steadily,” Somaiya told CNBC.
Meanwhile, RBI has been “very active in managing the volatility of the rupee,” he added. Latest data showed the RBI had about $616.9 billion in foreign exchange reserves as on Aug. 20.
Somaiya sees the Indian currency appreciating to levels near 72.20 against the dollar by the end of the year. In 2022, he expects the rupee to trade around the 73.50 to 74 level as the U.S. currency strengthens.
However, UBS strategists said in a note dated Aug. 25 that they expect the Indian currency to weaken to 77 per dollar by the end of the year and depreciate further to 79.5 by September 2022. “We see the year-to-date INR stability as short-lived,” the Swiss investment bank said.
On the macro front, the Indian economy expanded by a record 20.1% in April-June 2021 y-o-y, slightly higher than market forecasts of 20%. The construction sector surged 68.3%; manufacturing jumped 49.6%; trade, hotels, transport and communication 34.3%; mining 18.6%; utilities 14.3%; the farm sector 4.5%; and the financial and real estate sector 3.7%. On the consumption side, private expenditure increased 19.3%, investment 55.3%, exports 39.1% and imports 60.2% while public expenditure dropped 4.8%.