InvestorQ : What have been the reasons for the sharp gain in the Indian rupee in the last few days?
Tisha Malhotra made post

What have been the reasons for the sharp gain in the Indian rupee in the last few days?

Aashna Tripathi answered.
3 weeks ago

It has been a phenomenal rally by the Indian rupee. Just a week back, the rupee was hovering around Rs82.90/$ and most experts were already talking about the rupee going even to levels of 84 or 85/$. A lot has changed for the rupee and by the close of the week, the rupee is well and truly settled at a relatively strong level of Rs80.45/$. That is a sharp and rapid gain for the rupee in such a short span of time. Since the start of the year 2022, the rupee has weakened from Rs75/$ to $83/$. The RBI has also done its bit to help even depleting its reserves by nearly $120 billion to defend the rupee. However, there is only so much the RBI can do but fortunately, things are changing for the better for the rupee.

Several factors combined to help the rupee recover. Here is a quick look at some of the key factors that allowed the rupee to get stronger in the last one week.

1) The first is the not so oft discussed Chinese Yuan factor. Back in 2015, the sudden weakness in the Chinese Yuan had resulted in a forced weakening of the rupee. That is because all emerging market currencies need to compete and cannot allow one currency to devalue beyond a point. Amidst a weakening Yuan, China has reported better than expected trade and GDP data. That has boosted the Yuan and the rupee too.

2) Probably, the crowning story is that of FPI flows. It had been volatile in the last few months but November has seen a decisive shift upwards. FPIs had last infused $6.44 billion in August 2022. Subsequently, FPIs withdrew $1 billion in September and October was even stevens. In the first five trading days of November, the FPIs infused more than $2 billion into Indian equities. FPIs may be still disappointed that Indian government did not do enough to get Indian bonds included in the JP Morgan global bond indices but that is history and they are now focussing heavily on equities.

3) But, the one factor that tipped the scales for the rupee was the rather indulgent tone of the US Federal Reserve. The US Fed indicated in its latest Fed statement that it may opt for rate increases at a slower pace in the months ahead. With 375 bps rate hikes done, the Fed is likely to push for 50 bps in December and a few rounds of 25 bps each in the coming year, it looks a lot more benign. That has helped the rupee too.