However, the gains have been short-lived as the local unit has been impacted by outflows from foreign portfolio investors (FPIs) and persistent dollar buying by state-owned banks likely on behalf of the Reserve Bank of India (RBI) prevented the rupee from rising further.
ETMarkets.com"The rupee has taken a breather after a sharp weakening phase last year. How the trade situation turns out will be crucial for the future rupee move," said SK Mohanty, head of treasury at Bank of Baroda.
Mumbai: The Indian rupee rose nearly 1.7% last week, mainly on the back of the weakness in the US dollar as market commentary turned towards moderating interest rate hikes by the US Federal Reserve.
However, the gains have been short-lived as the local unit has been impacted by outflows from foreign portfolio investors (FPIs) and persistent dollar buying by state-owned banks likely on behalf of the Reserve Bank of India (RBI) prevented the rupee from rising further.
The Indian currency ended at ₹81.60 to the dollar, down from Friday's close of ₹81.32, after opening higher at ₹81.24 on Monday.
Foreign investors have turned net sellers in the local equity and bond markets, pulling out ₹19,838 crore as of Monday after investing almost ₹43,000 crore in November and December.
Bankers said besides the net FPI outflows, India's current account deficit and RBI's persistent dollar buying will weigh on the rupee. They expect the unit to trade in the broad range of ₹81-82 to the dollar in the short term.
"India's current account deficit is not going to go away in a hurry as oil prices remain volatile and exports are also soft. In this scenario, we need some inflows to support the rupee and make up for the deficit," said Bhaskar Panda, head of overseas treasury at HDFC Bank.
India's current account deficit shot up to an all-time high of $36.4 billion, or about 4.4% of GDP, in the quarter ended September 2022, mainly because of a widening of the merchandise trade gap.
The RBI has also been replenishing its forex kitty after spending most of last year defending the rupee against a runaway gain in the dollar. As a result, India's forex reserves have risen to $561 billion in the first week of January from a low of $524 billion in October.
Bankers say the future trajectory of the rupee will depend on how FPI flows turn out and whether India's current account situation improves.
"The rupee has taken a breather after a sharp weakening phase last year. How the trade situation turns out will be crucial for the future rupee move," said SK Mohanty, head of treasury at Bank of Baroda.
Some market participants are also watching out for the Union budget to be presented on February 1. "There are some expectations that the government may opt for a populist budget and announce an expanded borrowing programme, which could be detrimental for government bond yields and also have an effect on the rupee," said a senior public sector banker.
ETMarkets.com
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