The Centre’s and the Reserve Bank of India’s recent measures to attract foreign capital inflows are expected to ease pressure on the rupee and arrest its one-way slide, but a sharp appreciation remains unlikely amid persistent geopolitical uncertainty, market participants said.
Most analysts expect the rupee to trade in a range of 94-96 against the dollar in the near term, with further movement dependent on geopolitical developments and the scale of inflows generated by the measures. A FE poll of nine respondents found that 66% do not expect the rupee to strengthen beyond the 94-per-dollar mark in the near future.
On Friday, the Centre announced the removal of tax on capital gains and interest income earned by foreign portfolio investors (FPIs) from April 1. At the same time, RBI Governor Sanjay Malhotra unveiled a series of measures aimed at boosting dollar inflows. These included expanding the universe of government securities under the Fully Accessible Route (FAR), providing concessional forex swaps for overseas borrowings, covering the full hedging cost for FCNR deposits, and restoring the time limit for realisation of export proceeds, among others.
ALSO READWhy oil has not hit $200 despite a big supply shock — and what it means for India
Following the announcements, the rupee posted its biggest single-day gain in two months. The domestic currency appreciated by 85 paise to close at 94.94 per dollar, making it Asia’s best-performing currency on the day.
“The RBI’s latest measures have provided a much-needed cushion to the rupee amid ongoing geopolitical tensions. These are expected to bolster foreign inflows and India’s external position while reducing depreciation pressures on the currency,” said Kunal Sodhani, treasury head at Shinhan Bank.
However, he cautioned that elevated crude oil prices and geopolitical risks would continue to limit the rupee’s upside. “While the measures are unlikely to trigger a sharp appreciation, they should help prevent a move towards extreme weakness. As a result, the rupee is likely to remain range-bound in the near term, with a gradual move within the 92.50-96.50 band, provided global conditions do not deteriorate further,” he said.
Ritesh Bhansali, deputy chief executive officer at Mecklai Financial Services, said the measures would have a greater impact over the medium term and that their effectiveness would also depend on global market sentiment.
“These steps should put a stop to the one-way depreciation seen in the rupee. I would not rule out the currency reaching 93-94, but sustaining those levels looks unlikely at this stage,” he said.
Economists estimate that the measures could attract inflows of $40-50 billion.
ALSO READHow E85 fits into India’s plan to reduce crude oil imports
Geopolitical Tensions
The rupee has remained under pressure since the escalation of the West Asia conflict in late February, largely because of a sharp rise in crude oil prices. Brent crude climbed as much as 60%to touch $118 per barrel. The currency subsequently weakened to a record low of 96.97 per dollar on May 20 before recovering on the back of aggressive RBI intervention and some moderation in oil prices.
So far this calendar year, the rupee has depreciated 5.6%. Over the past 12 months, it has weakened by 9.5%.
Some economists expect the RBI to use incoming capital flows to reduce its forward dollar liabilities, which could keep the currency within a narrow range.
“The rupee should remain range-bound around 94.60-95.60. I believe the RBI will likely absorb capital inflows to reduce its forward book size, keeping the currency within that band,” said Guara Sengupta, chief economist at IDFC FIRST Bank. The RBI’s net short dollar position stood at $95.3 billion at the end of April.
When the RBI deployed a similar foreign-exchange strategy during the 2013 taper tantrum, the rupee appreciated by about 8-9%.
Some economists believe the currency could strengthen further if the anticipated inflows materialise. According to a report by State Bank of India, potential capital inflows of at least $40 billion could pull the rupee back towards the 92-93 range.
Economists at HDFC Bank also see scope for the rupee to strengthen towards 93 levels. “That said, uncertain global conditions, along with the RBI’s large short forward dollar book, could limit any sustained appreciation,” they said in a report. The bank expects the rupee to move back towards the 95-96 range by the end of the financial year after an initial period of gains.
TOPICSrupeeRupee vs us dollarThis article was first uploaded on June seven, twenty twenty-six, at twenty-five minutes past five in the evening. © The Indian Express (P) Ltd