InvestorQ : What was the reason for the sharp rally in the Indian rupee during the week?
sarah Leo made post

What was the reason for the sharp rally in the Indian rupee during the week?

Rashi Mehra answered.
9 months ago

There seems to be some positive strength in the Indian rupee. The INR rose its highest level in 6 months and sustaining its strong gains through the week. The INR was also helped by the fact that the RBI refrained from currency intervention as FPIs piled into equities.

The rupee is up by nearly 2% during the week ending 28 August, representing its biggest weekly gain since December 2018. For a long time, the INR was trading in a tight range as the RBI did not allow the INR to appreciate too sharply to protect exporter interests.

The Indian rupee ended Friday at 73.3850 per dollar, one of its strongest levels seen since the first week of March this year. To an extent the INR has also been helped by a consistently weak dollar which is evident from the sharp fall in the dollar index or DXY.

The big driver for the INR strength has been FPI flows. These FPIs have infused $6.2 billion so far in August into Indian equities as the US Fed also helped by keeping liquidity abundant. This is expected to further boost the inflows of dollars into India.

The big trigger came from the Fed rewriting its approach to monetary policy. Fed is doing away with the sanctity of the 2% inflation target as well as the employment target. The Fed is likely to keep rates at around zero levels for the next five years.

In addition, the rupee has also got a boost from the consistent build up of forex reserves. Economists expect that the forex reserves could scale closer to $650 billion by the end of the fiscal year 2021-22.