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Six Factors Driving Indian Rupee Right Now!

Apr-12-2021Blog by – Mr. Dhruv AjmeraRead Time: 4 Min.Word Count: 891
51Six Factors Driving Indian Rupee Right Now!

Indian Rupee or INR has been largely supportive over last few days following a continued recovery as online equity trading remains tilted in favor of bullish local equities. The Rupee hit near one year high around 72 per US dollar in last week of February as local benchmark stock market indices hit fresh highs. The INR slipped thereafter though and tested a two month low near 74 per US dollar mark. The USD/INR derivatives are traded on major exchanges and could be traded through currency trading brokers in India. The INR stayed broadly supported thereafter though volatile equities capped the upmove. Here are the five important factors which are likely to shape up the overall price action for INR in coming weeks. The RBI plays a very important role in stabilising the Rupee.

Local Equity Markets: The local share markets have been mostly elevated in the last few months. After ending the year 2020 on a firm note, the benchmark Nifty 50 edged up further and hit a fresh all-time high in February 2021. A continued fall in daily Covid-19 cases and upbeat data on economic front which reflected a strong recovery worked in favor of the markets.  Most share brokers offering online trading services are expecting local stock markets to stay supportive over the coming months. This is considered to be a highly positive factor for the INR as it indicates buying support from foreign institutional investors. Foreign Institutional investors have been big buyers in the Indian stock market as a result of which the Indian currency has been in demand thereby finding good support.

Crude Oil And Commodity Prices: Soaring commodity prices tend to be mostly adverse for Indian Rupee. So far, there is no evidence of the recent spurt in crude oil and base metal prices which hit multi year highs to put a pressure on India’s foreign trade dynamics. The overall trade deficit for April-February 2020-21 is estimated at USD 7.80 Billion as compared to the deficit of USD 75.90 Billion in April-February 2019-20. This is placed comfortably for the INR right now though rising imports in coming months following the steady recovery in spending and corporate expenditure may keep a check on Indian Rupee. 

Economic Recovery: Indian economy continued to show signs of resilience as constantly falling Covid-19 cases and vaccine rollouts supported the sentiments. Global economic data also reflected a steady recovery.  India came out of a recession, clocking a growth of 0.4% in Q3 of FY21. The economy had witnessed a GDP contraction of 24% and 7.5% in Q1 and Q2 of FY21, respectively. GDP at Constant (2011-12) Prices in Q3 of 2020-21 is estimated at Rs 36.22 lakh crore, as against Rs 36.08 lakh crore in Q3 of 2019-20.

Corporate Earnings: Reserve Bank of India has released data on the performance of the private corporate sector during the third quarter of 2020-21 drawn from abridged quarterly financial results of 2,692 listed non-government non-financial (NGNF) companies. With gradual easing of restrictions related to the Covid-19 pandemic and rebound in demand conditions, sales of 1,685 manufacturing companies expanded by 7.4% (Y-o-Y) in Q3:2020-21 after recording contraction during the preceding six quarters; the recovery was led by iron and steel, automobiles, cement, chemicals and pharmaceuticals companies.

RBI Policy Action:  The Reserve Bank of India or RBI has been keeping its monetary policy stance accommodative over the last few months. The RBI in its monetary policy meeting in February 2021 kept interest rates unchanged for the fourth consecutive meeting and said that the near-term inflation outlook has turned favorable. Shaktikanta Das, Governor, Reserve Bank of India has expressed optimism about the overall COVID-19 situation following the roll-out of the vaccines. 

US Dollar Movement: The currencies are always traded in pairs. The US dollar tends to influence global currency markets very heavily. The movement in Indian Rupee against major global currencies is therefore also linked to what is happening with the US dollar overseas. This is where the US dollar index comes in the picture.  The US dollar index is a highly popular measure of the value of the US dollar relative to a basket of currencies of the majority of the US`s leading trading partners. The dollar index has turned lower over last few months, falling to a 27 month low under the 90 mark in December 2020 before witnessing some gain. Most currency trading brokers in India analyze the US dollar movement for taking a call on the direction of Indian Rupee. 

Conclusion: 

Despite the latest correction in local equity markets, which pulled the benchmark NIFTY 50 index to near two and half month low in mid-March 2021, the overall economic undertone remains supportive for India. More importantly, the inflow of overseas investments geared for long term stays strong. India has attracted a total Foreign Direct Investment (FDI) inflow of US$ 67.54 billion during April to December 2020. It is the highest ever for the first ninth months of a financial year and 22% higher as compared to the first ninth months of 2019-20. FII equity inflow grew by 40% in the first 9 months of F.Y. 2020-21 compared to the year ago period. This is likely to benefit the Rupee though volatile equities can keep the near term price action choppy. 

Also Read: Here Are The Top Performing Sectors For This Year!

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