Currency markets offer an exciting avenue for the retail traders and investors looking to explore various options to increase their investment returns. Domestic currency markets have seen a good interest over the years and best financial brokers are offering the facility to trade in currencies to their clients. With the global and domestic financial markets witnessing a massive run up, the Indian Rupee has also edged up in recent weeks. However, while Nifty has scaled up nearly 40% from its four year low in March 2020, the gains in INR are modest. Let us summarize a few key points which are affecting the performance of currency markets and understand why they matter for Indian investors. 

Coronavirus or Covid-19: The spread of the COVID-19 pandemic and economic disruptions that ensued have been a major factor that dragged the Indian rupee to doldrums. The currency had witnessed a slide of more than 8% since January 2020, approaching Rs 77 against the dollar, for the first time on record in April. Rupee fell deep alongside its other emerging market currencies in the last few months due to COVID-19 lockdown & slowdown in economic activities. With the daily Covid-19 cases count hitting fresh highs every day, the overall movement for the INR will likely be muted. 

State of Equity Markets: The prospects of a global recession on coronavirus saw foreign investors rowing out of the Indian capital markets bruising the Indian currency. Indian equities crashed over 38%, year-to date, in March, when the lock down began, witnessing one of the fastest crashes in stock market history. Investors fretted over the impact of the rapidly spreading pandemic as the IMF predicted global contraction on par with the Great Depression of the 1930s. However, after the sharp plunge, a post-March rally pushed up the equities higher impressively. India’s benchmark Sensex has rallied, trimming the overall impact in July to around 10% from the 38% plunge. This sharp rebound in local equities also dominated local currency markets, supporting the Indian Rupee. 

Economic Downgrades: Downgrades by major rating agencies and lower growth projections by the IMF and World Bank citing risks from sustained low growth of the Indian economy as compared to the potential and concerns over debt affordability is seen limiting gains in the Indian currency over the medium term. The best currency brokers offer periodic assessment regarding the economic outlook and its impact on currencies.

Geopolitical Worries: There was a massive military confrontation along the border with China that took the Indian currency plunging back close to its April lows, once again breaching the Rs 76 per dollar mark in mid-June, whereas other emerging market currencies continued climbing the ladder. While there have been signs of some easing in these tensions, a flare up in the issue would potentially weigh on the INR. 

Foreign investors: Soaring global markets and easing of lockdown restrictions pushed foreign investors back into the Indian market. Foreign Portfolio Investment or FPI inflows stood at a 15-month high level in June. India received FPI of over Rs 26,000 crore in June mainly driven by a high volume equity inflow, which was the highest FPI inflow after March 2019. The overseas investors have infused Rs 14,569 crore and Rs 21,832 crore in the domestic equity markets in the month of May and June respectively after registering outflows of Rs 61,973 crore and Rs 6,884 crore in March and April respectively.

Healthy Forex Reserves: Healthy inflows in the form of FPI and Foreign Direct Investment or FDI with decline in import outflows due to sharp fall in crude oil prices coupled with impact of pandemic on trade have contributed to a surge in India’s foreign exchange reserves to cross a half trillion dollar mark. It is also encouraging that FDI’s which are more stable and long term in nature have contributed majorly to the large increase in forex reserves. Net inflow of FDI in FY20 was much higher at $43 billion as against $30.7 billion recorded in FY19. 

Trade Surplus: Indian Rupee has also been boosted by a trade surplus in June for the first time in 18 years.  India’ merchandise imports contracted 47.59% in June to $21.11 billion from a year ago, while exports also fell 12.41% to $21.91 billion, leading to a marginal trade surplus.

US dollar Movement: The currency market movement is always expressed in terms of pairs and the value of one currency tends to affect the value of the other currency to a great extent. This is where the sharp decline in the US dollar over the last few weeks is coming in picture for Indian Rupee. The US dollar index fell to a 26 month low of 92.50 in the last week of July 2020. This index measures the performance of the dollar against its major trading partners and a heavy slide in it augurs well for the emerging market currencies like INR. 

Conclusion

The Indian rupee has edged up from the starkly low levels seen in April in line with other emerging market currencies which have also recovered from their record low levels. The risk appetite among investors is seen improving by a surge in local equities but has kept the rupee far from appreciating significantly given the broad uncertainty owing to Covid-19 spread. Despite a slew of negative events and news on the global front, rupee has maintained a narrow band. Nevertheless, encouraging forex reserves, improving equities, lower global oil prices and current account surplus are likely to be supportive for the INR.