RBI kept the rupee ‘exceptionally’ stable so far, and the tide could turn for the better say experts

• The Indian rupee has hit new record lows against the US dollar this year, but experts are not fazed about it.
• They believe that India’s central bank has done an ‘exceptional’ job of it so far, and that the veritable achche din could soon be here.
• However, for the next few months, Indian markets could flirt with the bear market territory.

A looming global recession, unprecedented inflation and a strengthening US dollar has forced central banks around the world to use their forex reserves to keep their currencies from falling too much. The Reserve Bank of India has done an ‘exceptional’ job of keeping the rupee stable so far, experts say.

Barring anything extraordinarily bad, experts believe that inflation and recession concerns will cool down in a few months, leading to a rebound in markets like India.

Indian markets trading near their ‘comfort zone’

This week alone, the rupee has seen a decline of over 30 paise – touching a record low. But that too hasn’t taken Indian markets into the bear zone. Neither are the experts in total despair.

“We are cautiously optimistic on India – cautious over the short term and bullish over the long term,” Shrikant Chouhan, executive vice president, Kotak Securities told Business Insider India.

He underlined that the Indian markets are already trading near their comfort zone, and that much of the pain in the market has already been realized.

In simpler words, Chouhan suggests that much of the correction that was to happen has already taken place, and any further decline is only a positive as a rebound is on the cards.

According to him, Indian markets have remained relatively strong as compared to peers like Indonesia and Brazil. Much of this is due to the strong buying by domestic investors even as foreign investors continued to pull out record money from India.


For FIIs to come back, oil needs to fall below $100/barrel

Foreign investors have pulled out over ₹2.5 lakh crore from the Indian markets in 2022. Looking at the way things are going, this month could be the worst ever in the history of Indian markets.


While that paints a doomsday picture, it is not as grim as it looks. Record yields in the US, a strengthening US dollar and a depreciating rupee have come together at the same time to provide foreign investors every reason they need to pull out money from India and invest it in bonds in the US, explained Chouhan.

“The FPI flows could stay negative for now, unless crude oil collapses below $90 a barrel,” said Anindya Banerjee, vice president, currency and interest rate derivatives at Kotak Securities.

Rupee fall – RBI isn’t targeting a level

Currencies all over the world have witnessed significant volatility in the past few months. Experts however believe that the worst might be behind us.

For instance, the rupee closed at 78.32 today against the US dollar, which is another record low. Experts are not too fazed by the fall, despite the 5-5.5% depreciation in rupee against the dollar this year.

“They are not really targeting a level – targeting a level won’t work. They are trying to keep the rupee stable by keeping the volatility low. This is something that they have achieved remarkably well,” Banerjee added.

He compared the volatility in the value of rupee with that of other leading currencies in the world, saying that the rupee has been amongst the best performers.


RBI is using its forex reserves to keep Rupee stable

RBI still has $30-35 billion in forward markets, and over $500 billion in the spot market to keep the rupee stable, said Banerjee.

“The RBI has been intensively intervening in the currency markets via spot and forwards. There has been a fall in the forex reserves by almost $45 billion. The central bank has also used the reserves for crude import payments too,” Heena Naik, research analyst – currency, Angel One, told Business Insider.

Essentially, given that India has a trade deficit – its imports are higher than exports – the value of the rupee will continue to decline. It is the decline that needs to be managed, Banerjee explained.

Experts believe that the value of the rupee could remain between 76-80 per dollar.

Better days ahead, but it all depends on US Fed’s July meeting


Banerjee says that emerging markets like India have faced the brunt of errors by the central banks of developed markets like the US. While all of them believe that better days could be ahead of us, they are awaiting the outcome of the US Fed meeting in July.

“If the Fed announces a rate hike of 100 basis points, then we could see a drastic fall in Indian markets. However, a rate hike of 50 basis points could result in a pullback,” Chouhan said.

He suggests that Nifty 50 could remain range-bound between 14,800-15,500 until the Fed announcement. The direction will depend on the actual rate hike, he said.

Banerjee says that the 10-year yield curve in the US has started to invert, and once that is complete, FII flows could turn positive. This will provide a major boost to the markets, he said, but the process could take 3-4 months yet.

Until then, the Indian markets will continue to flirt with the bear market territory, and hopefully that’s just what they will do.

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