Indian rupee to depreciate towards $76.50 in FY22

4 April, 2021 12:00 AM printer

NEW DELHI: The Indian rupee was the worst-performing Asian currency in CY20 (-2.4%) as the Reserve Bank of India used the phase of USD weakness to absorb inflows, accumulate reserves and correct rupee overvaluation. For FY21, rupee has appreciated 3.3 percent which is much lower when compared to appreciation seen in other Asian currencies.

The 3-month implied volatility in USD/INR during the peak of the COVID crisis was barely 11 percent compared to 20 percent during the Taper Tantrum period in 2013 and close to 30 percent during the Sub-Prime mortgage crisis back in 2007, report agencies.

Given the unprecedented nature, the COVID crisis first triggered an outflow from riskier emerging market (EM) assets. But after the global central banks pumped in money to boost their economies, huge inflows into EM assets were seen.

One must give full credit to the Reserve Bank of India (RBI) for the way it has managed the Indian Rupee's movement in FY21, report agencies.

RBI has successfully contained volatility in USD/INR in extremely challenging times. The peak volatility in USD/INR that seen in prior crises has been much higher than what was witnessed during the peak of the COVID crisis in India.

The RBI has built up a formidable reserve buffer as a result of which our external position is much more robust. We would be far more resilient to external shocks such as a spike in crude prices or a US rate hike cycle.

Our analysis shows, higher the FX Reserves to External debt ratio, lower is the volatility in USD/INR.

The RBI has also been successful in correcting Rupee overvaluation, especially against the Yuan which is crucial to support the government's Atmanirbhar campaign. The RBI has kept speculators at bay and has not allowed extreme positioning to build up on either side. As a trader, what the RBI would do weighs on your mind every time, and therein lies the success of the RBI.

RBI allowed Indian banks to participate in the offshore market and that, too, has dampened the transmission of shocks from offshore to onshore. We are now seeing fewer gap moves in USD/INR.

Rupee has been the best performing Asian currency year to date (in CY2021) by some distance. The recent weakness in Rupee can be attributed to a confluence of factors.

The nationalized banks had persistently been on the bid in USD/INR in the last few sessions, likely on behalf of the RBI.

A higher USD/INR closing on financial year-end would augment MTM on RBI's FX Reserves. The Rupee had become overvalued in REER (Real Effective Exchange Rate) terms. CNY/INR had corrected from 11.40 to 11.07 levels. The recent move could also have been intended in part, at correcting this overvaluation.