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Informist, Tuesday, Oct. 1, 2024

 

By Sourabh Kumar and Kabir Sharma

 

MUMBAI – The Reserve Bank of India's active dollar purchase intervention is likely to ensure that the rupee does not benefit much from robust foreign portfolio investment inflows and ends October steady against the dollar. According to the median forecast of 17 respondents from banks, corporations, and brokerages polled by Informist, the Indian currency is expected to end the month at 83.77 a dollar, not too far from September's close of 83.7925 a dollar.

 

In September, foreign portfolio inflows into India rose to their highest level since November 2020, and are expected to remain robust this month as well on growing expectations of further interest rate cuts by the US Federal Reserve this year. The US Federal Open Market Committee began its easing cycle with a 50-basis-point rate cut at its September meeting.

 

Foreign portfolio investors net infused $11.2 billion into the Indian markets last month, with over 60% going into the domestic equities market, according to the latest data from the National Securities Depository Ltd. India's increasing weightage on JP Morgan's emerging market bond index, which will reach a maximum 10% by March, will also attract 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.

 

The Indian currency may also find support from weakness in the dollar index, poll respondents said. The dollar index declined 1% last month, and market participants expect it to fall more in the near term, with further rate cuts by the Fed on the horizon. The Fed's next policy meeting is scheduled for Nov. 6-7. Fed fund futures show a 38.2% probability of a 50-bps rate cut in November and a 61.8% chance of a 25-bps rate cut, according to the CME FedWatch tool.

 

Additionally, easing crude oil prices may give the Indian currency a leg-up, market players said. While the demand for crude oil is expected to rise in the coming months due to heating demand in Western nations during winter, prices are likely to remain subdued as the Organization of the Petroleum Exporting Countries, along with its allies, is scheduled to increase output in December. A drop in crude oil prices decreases India's import bill, which supports the Indian unit.

 

Brent crude oil prices fell over 5% last month on growing concerns around the demand outlook as global economic growth slows. In a report in early September, the International Energy Agency scaled down its forecast for growth in global oil demand in 2024. The agency expected crude oil demand in 2024 to rise by 900,000 barrels per day, down from its previous estimate of 970,000 barrels per day. 

 

However, even with all these positive factors on the cards, the final call on the currency's movement will continue to lie in the central bank's hand, according to respondents in the poll. "The rupee will definitely not go above 83.50 and not fall below 84.00, as the governor has made it quite clear that there will be a low volatility regime," said Sajal Gupta, executive director and head of foreign exchange and commodities at Nuvama Institutional Desk. "It has been a year now, and I think everybody understands this."

 

Of the 17 respondents, only one expects the Indian unit to rise above the key technical resistance of 83.50 a dollar in October, and only one sees it falling below the psychologically-crucial level of 84.00 per dollar this month, indicating that the Indian unit will continue to move in a tight range.

 

Last month, the apex bank actively purchased the greenback at around the 83.50-a-dollar level. Market participants expect the RBI to continue keeping the Indian unit from rising sharply as it remains highly overvalued in comparison to 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.

 

"RBI has been accumulating reserves at lower levels and has not allowed the rupee to appreciate beyond 83.40 despite most peers like the yuan and South Korean won appreciating because of the REER still being near to 105," said Anil Kumar Bhansali, head of treasury and executive director at Finrex Treasury Advisors LLP. "Any appreciation caused would increase imports and simultaneously the trade deficit while exports will be affected on an appreciated rupee."

 

Since last year, the RBI has been a dominant player in the currency market by keeping a strong grip on the exchange rate. It looks unlikely that the intervention strategy will undergo any significant change in the near term.

 

POLL DETAILS

 

Participants	October end	December end
Bank of Bahrain and Kuwait	83.75-84.00	83.50
Bank of Baroda	83.70-83.80
CR Forex	83.80-84.00	83.60-83.80
CSB Bank	83.75-83.80	84.00
DBS Bank	83.60
DCB Bank	83.50-84.00	83.75-84.25
Edelweiss Securities	83.80-83.90	83.50
Federal Bank	83.50-84.00
Finrex Treasury Advisors LLP	83.90	83.96
Foreign Bank	83.60-83.88
HDFC Securities	83.90	83.60-84.10
ICBC	83.50-83.75
Karur Vysaya Bank	83.90-83.95
Kotak Mahindra Bank	83.75-84.00	83.50-84.25
Large brokerage firm	83.49-84.04	83.05-84.30
Large engineering co	83.50-83.80
Mecklai Financial Services	83.70	83.40
Median	83.77	83.78

 

 

End

 

US$1 = 83.82 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Rajeev Pai

 

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