Rupee best-performing Asian currency so far in January

After an extremely stable 2023, the Indian rupee started 2024 on a promising note and has turned out to be the best-performing Asian currency so far in January, appreciating 0.1 per cent despite 2 per cent rise in the dollar index.

All other Asian currencies depreciated by around 1.4-4 per cent during the month.

The local currency regained its ground against the greenback on the back of foreign portfolio inflows, said market participants.

“The markets are front-running the anticipated flows through the bond inclusion.

"That’s possibly the reason why the rupee has remained largely stable,” said Indranil Pan, chief economist at YES Bank.

The rupee settled at Rs 83.11 per dollar on Friday.

The domestic debt market witnessed a net inflow of Rs 15,793 crore in January.

J P Morgan has included India in its flagship index GBI-EM Global Diversified index. India will join the index with 1 per cent in June.

The weight will increase by 1 per cent each month until 10 per cent in April 2025.

Additionally, Bloomberg Index Services Limited (BISL) has launched a consultation paper seeking feedback on the proposed inclusion of the India Fully Accessible Route (FAR) bonds in the Bloomberg Emerging Market (EM) Local Currency Index.

In December, the dollar index experienced a notable decline of over 2 per cent, primarily fuelled by expectations that the US Federal Reserve could start rate cuts in March.

However, the landscape shifted as recent data underscored the robustness of the US economy, prompting a revision of expectations and the deferral of anticipated rate cuts.

According to CME Group's FedWatch tool, the sentiment among traders has evolved, with 42 per cent now anticipating a 25-basis-point rate cut by the US Federal Reserve in March.

Notably, at the close of December, a more significant 75 per cent of traders were expecting a rate cut in March.

“Reserve Bank is capping any depreciation… Other Asian currencies are locked up with what is happening with the dollar.

"Whereas in Indian rupee, it's the opposite of what is happening,” said Vikas Goel, managing director (MD) and chief executive officer (CEO) at PNB Gilts.

“The Reserve Bank has already capped it, and then there is a lot of capital flows in, particularly in the debt segment.

"So, the upside is limited. Then obviously, it will probe a little bit on the downside.

"Having said that, the Reserve Bank is also very active below the level Rs 83 per dollar.

"That is why it is in a very narrow range,” Goel added.

Market participants expect the rupee to appreciate further in the current calendar year.

“If flows remain healthy, we should have a reasonable balance of payment surplus, which significantly the RBI should be mopping up. But for the next year, we are looking at the rupee going down to about Rs 82.50 a dollar,” said Pan.

According to a report by CareEdge Ratings, the rupee is seen appreciating up to Rs 82 per dollar in 2024.

However, the report also said that interventions by the Reserve Bank of India (RBI) to build forex reserves might act as a counterforce to curb the appreciation of the rupee.

India’s foreign exchange reserves were at $616 billion as of 19 January, 2024, the latest data released by the Reserve Bank of India showed.

The rupee displayed remarkable stability against the US dollar in the year 2023, marking the least volatility witnessed in nearly three decades.

The local currency experienced a marginal depreciation of 0.5 per cent against the greenback.

The last time the Indian unit exhibited such stability was in 1994, when it appreciated by 0.4 per cent.

The stability was attributed to the Reserve Bank of India’s timely intervention in the foreign exchange market, both in terms of selling and buying dollars.

Market participants said that the timely intervention protected the local currency from weakening further to 84 per US dollar during the year.
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