InvestorQ : What in your view are the main reasons why the rupee has suddenly strengthened against the dollar last week?
vaishnavi mhatre made post

What in your view are the main reasons why the rupee has suddenly strengthened against the dollar last week?

vidhya Laxmi answered.
2 weeks ago

In the previous week, the rupee saw a sharp rally. From a low of Rs83/$, the rupee has rallied very smartly to a level of Rs80.50/$. This has been a rapid rise in the rupee in a period when the INR has been under pressure for most part of the last few months. Here are some factors that have driven or triggered the strength in the Indian rupee.

1) The first positive that triggered strength in the rupee is that FPI flows are back to positive territory after a break of 2 months. In fact, there were 2 rather disappointing months in September and October 2022. In September, the FPI flows were positive for the first 3 weeks. However, the last week of September saw $2.5 billion of FPI selling and the month ended with negative flows. In October, the FPIs had infused close to $1 billion in the first half, but that entirely got neutralized in the second half and ended the month on a neutral note. In contrast, November 2022 has seen FPIs infusing $2 billion in the first 5 days of the month itself. That has been a big positive trigger for the rupee.

2) A story that is not often discussed is the strengthening of the Chinese Yuan. In the last few months, the Chinese Yuan had dropped sharply amidst its stringent zero COVID policies and signals of a clear slowdown in growth. However, for October 2022, China has seen a revival in its trade as well as GDP data and that has led to strength in the Yuan. What is the relationship. Obviously, the Yuan being an EM currency like the INR, now tends to put less pressure on the INR to weaken to stay competitive. Just a few weeks back, the situation was almost grim like in 2015, when a sharp fall in the Chinese Yuan had led to a sharp fall in the rupee too. That has changed for the better.

3) At a global level, a very important trigger that is helping the rupee is that the US Fed is clearly indicating that rate hikes would be at a more sober pace in the future. The days of 75 bps rate hike may be over. With inflation coming in lower at 7.7% in the US, we could see 50 bps rate hike in December and a few more hikes of 25 bps after that. That means; the risk of smart capital flowing out of India to developed economies is search of higher risk adjusted returns, is not an issuer any longer.

4) Last, but not the least, India has dealt with the crisis extremely adeptly at a policy level and we cannot ignore that fact. For instance, Growth has not fallen too hard and inflation is well in control. To add to that; India did not leave out any of its segments even ensuring higher allocations to food and fertilizer subsidies amidst tough budgetary conditions. India has managed a critical policy transition with a lot of adeptness which has given a lot more confidence to the markets. That is perhaps, one of the very important factors driving the rupee strength.