More Stories

Informist, Tuesday, Oct. 1, 2024

 

By Pratiksha

 

NEW DELHI – Inflows into India from foreign portfolio investors were the highest ever in September, but the Indian rupee barely benefited as the Reserve Bank of India actively stocked up on dollars. 

 

In the face of FPI inflows amounting to almost $11.2 bln last month, the Indian currency gained only 0.1% against the dollar. Other Asian currencies gained 0.1-9.8% against the greenback, with the Thai baht being the top performer, due to an over 1?cline in the dollar index. The dollar index weakened after the US Federal Open Market Committee kicked off its easing cycle with a 50-basis-point rate cut at its September meeting. . 

 

Market participants said that FPI inflows in India picked up on expectation of further interest rate cuts by the US Federal Reserve this year. While in debt, inflows remained robust due to the inclusion of Indian government bonds in JP Morgan’s Government Bond Index – Emerging Markets suite in June. Of the total FPI flows in September, $6.9 bln was invested in domestic equities, the highest in a month since December, and $3.9 bln in debt, highest in over seven years, according to latest data by the National Securities Depository Ltd. 

 

"For months, I've been saying that this is the moment when investors would come into the Indian market. That is exactly what has happened...", said Ashhish Vaidya, the managing director and country treasurer at DBS Bank India, on the US interest rate cut. "US (Treasury) yields have cooled off, which would naturally draw investors to India."

 

However, the Indian currency barely benefited from this because of the RBI's active dollar purchases around 83.50-a-dollar level. Case in point: On Sept. 23, the Indian unit rose to 83.4350 a dollar during the day, its highest level in nearly three months, but went on to close at 83.5525 a dollar. 

 

Dealers say that the central bank has been intervening to keep the Indian currency from appreciating sharply due to the rupee being highly overvalued in comparison with its trading partners. The rupee's real effective exchange rate against a basket of 40 currencies, in terms of trade-based weights, was 105.45 in August. A print above 100 indicates that the currency is overvalued vis-a-vis the currencies of 40 major trading partners. A rise in a currency's REER is an indication that the country's exports are becoming expensive, and it is losing trade competitiveness.

 

Further, market participants pointed out that the central bank has been on a building spree when it comes to foreign exchange reserves, and its active absorption of the inflows may be a step towards just that. India's foreign exchange reserves hit an all-time high of $692.30 bln as of Sep 20, rising for the sixth consecutive week. 

 

"The Reserve Bank of India has stepped into the fray. By capping further appreciation at the 83.50 level and absorbing significant dollar inflows—evidenced by the rise of forex reserves to an impressive $692 billion, the RBI has demonstrated its commitment to stabilising the rupee," said Amit Pabari, the managing director, CR Forex. 

 

Apart from RBI intervention, strong dollar demand on behalf of importers looking to meet their quarter-end payments also weighed on the local unit, according to dealers. Going ahead, market participants expect FPIs to remain positive on India with further rate cuts by the US Fed on the horizon. India's increasing weightage on JP Morgan's emerging market bond index, which will reach a maximum 10% by March, will also draw in more active investors from the global market. With the pace of US rate cuts likely to exceed India's, the interest rate differential between the two economies will also attract sustained FPI flows.

 

"India's robust high frequency growth indicators along with prudent fiscal policy has already attracted stable foreign capital in terms of FDI. FPIs have also seen a sharp turnaround and the pace is likely to continue as global index weightage is gradually increasing," said Madan Sabnavis, chief economist at Bank of Baroda, in a report. "On external front, enough cushioning in terms of adequate forex reserves along with timely intervention of RBI will ensure volatility of rupee to be largely contained.

 

However, currency market players are not too sanguine on the impact of the same on the rupee. They expect the central bank to continue to be proactive in making the most of every opportunity to fill its forex buffers further.  End

 

US$1 = INR 83.82

 

Edited by Akul Nishant Akhoury

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2024. All rights reserved.