Strong dollar demand to tank Indian rupee before making recovery

The Indian rupee could depreciate over the coming days against the US dollar and UAE dirham due to strong demand for the former from importers, higher oil prices and funds outflow from equity markets.

But the South Asian currency will make a smart recovery as India’s economy recovers from the impact of the Covid-19 pandemic, say industry executives and analysts.

However, the Reserve Bank of India (RBI) could step in if the rupee crosses 74 versus US dollar (20.16 against dirham) again to stabilise the currency.

The rupee hit its lowest in 2021 on Friday, reaching 20.16 against the dirham (74 versus the greenback) due to outflows from equities triggered by global risks and inflows into US Treasury bonds. The currency sank from 19.68 on Thursday to 20.16 on Friday against the Emirati currency, losing 2.45 per cent of its value. It last closed at 20.04 versus the dirham and 73.63 against the dollar.

“We have a few volatile days ahead and above 74.00, expect the RBI to be on offer, trying to control the volatility. Forex swap points crashed on Thursday as the RBI allowed investments by onshore banks in foreign government and foreign central banks issued securities to be exempt from the large exposure framework. This would open a way for US dollars to go out of the banking system,” said Simon Ballard, chief economist at First Abu Dhabi Bank.

Richard Wason, CEO of Lulu Financial Holdings, forecast that the rupee might trade between 73.67 to 74.08 in the days to come before making a smart recovery.

“In the near future, the rupee might move between 72.83 to 74.08 versus the dollar [or 19.76 to 20.16 against the dirham]... it might see some more weakness amidst a rise in oil prices and some more correction in the stock market,” Wason said, adding that there is month-end demand for dollars from importers and defence departments.

Antony Jos, managing director of Joyalukkas Exchange, said the rupee has witnessed a sudden downfall against the dollar as US Treasury yields jumped to the highest level in more than a year.

“These sentiments agitated investors for a global sell-off in the market and higher crude prices kept the pressure on the rupee. However, the data shows India’s GDP expanded by a rate of 0.6 per cent in the three months ended December 2020 compared to the previous quarters. It provides a positive outlook,” he said.

“We think that the rupee could hit 73.50 and then see a stabilised position where we could see scope for appreciation.”