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    Why is rupee still relatively soft despite weakness in dollar?

    Synopsis

    In the past one month, the dollar index — which measures the dollar against major world currencies — dropped more than 4%, show data from Bloomberg. In this period, the rupee’s value against the greenback has increased just about 1%.

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    During the financial crisis of 2008, India’s foreign exchange reserves were $310 billion, exceeding the then total external debt of about $224 billion.
    Mumbai: The rupee is experiencing something unusual. The Indian currency is trading relatively weaker compared with emerging market peers such as the Brazilian real and the South African rand — this hasn’t happened for many years.

    The Reserve Bank of India's intervention in the currency market has prevented the rupee’s appreciation despite a surge in dollar inflows. The central bank is seen buying dollars from the forwards market, which will check rupee liquidity in the banking system that has a surplus of Rs 3.35 lakh crore.

    In the past one month, the dollar index — which measures the dollar against major world currencies — dropped 4.33%, show data from Bloomberg. In this period, the rupee’s value against the greenback has increased just about 1%.

    “The global dollar weakness is not translating into any meaningful rupee strength as the RBI intervention continues to provide floor to the dollar (around 74.50),” said B Prasanna, the group head for global markets sales, trading and research at ICICI Bank.

    “The dollar index has come under immense selling pressure in recent weeks as the continued surge of the pandemic in the US is clouding its growth and fiscal outlook,” he said.

    The US Federal Reserve has kept interest rates unchanged Wednesday, citing uncertainties over the pandemic.

    In the past one month, the rupee rose just about 1%, ranking 13th among its emerging market peers including the Chinese renminbi, Philippine peso and the Singapore dollar, show data compiled by ETIG. On Friday, the local currency closed a tad higjer at 74.81 to the dollar.
    Rupee snip 1
    “The RBI is likely to extend its dollar purchases unless it (forex reserves) surpasses the external debt,” said Anidya Banerjee, a currency analyst at Kotak Securities. “The rupee has been made weaker by the relentless intervention from the RBI, which may be following the Bimal Jalan committee report."

    During the Great Financial Crisis of 2008, India’s foreign exchange reserves were $310 billion, exceeding the then total external debt of about $224 billion.

    Currently the forex reserves are at a record high of $517 billion. At the end of March, India’s external debt was $558.5 billion, show latest data available from the RBI.

    The Bimal Jalan committee had noted that given the expanding net negative international investment position of India, the magnitude of foreign exchange reserves provides confidence in international financial markets.

    Dollar liquidity is ample and so is inflow into domestic equity, making this possibly the best time for the RBI to increase its forex reserves both via the spot and forward markets, said Kunal Sodhani, Shinhan Bank India’s assistant vice president for global treasury centre. This will help fight any vulnerability in coming times without any depreciation on the rupee, he said.

    Investment announcements worth nearly $15 billion by foreign funds and companies, including Facebook’s investment in Jio Platforms, have increased dollar inflows. Foreign portfolio investors, meanwhile, have pumped in a net Rs 6,141 crore into the local equity market.
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