Rupee Increase by One Paisa Despite Inflation Concerns and US Currency Strength

Last Friday saw the rupee pared its initial gains and settled just 1 paisa higher at 77.49 against the US dollar as inflation concerns and the strength of the American currency weighed on the local unit. According to forex traders, the rupee consolidated in a narrow range as the weakness in regional currencies and depressing economic data weighed on the domestic unit, only to be saved by the Reserve Bank of India (RBI), thus restricting further losses. At the interbank forex market, the rupee opened at 77.35 against the greenback and moved from 77.26 to 77.49 on the said day. Interestingly, the rupee would finally end at 77.49, higher by just 1 paisa over its previous close. The previous day had seen the rupee plunge 25 paise to close at its lifetime low of 77.50 against the US dollar.

Moving to the weekly timeframe, the rupee had depreciated 57 paise on the back of a stronger dollar index due to risk-off sentiment and foreign fund outflows. This has affected activities in forex market timings India and been felt by most traders. According to Dilip Parmar, Research Analyst, HDFC Securities, “among all the drivers, the liquidity factor is inevitably a key driver of recent market moves, and market participants are rushing for safe-haven assets.”

 Palmar went on to add that last Friday, the risk appetite remained dismal, with the benchmark equity index erasing morning gains and the rupee also surrendering to the USD. Its weakness in regional currencies and depressing economic data that is weighing on the rupee, and only intervention from the RBI that had restricted the losses.

 Ongoing Inflation

 Grappling with inflation and looking at the bigger picture, India’s headline inflation got into its seventh month to touch an 8-year high of 7.79 percent last month, fueling rising food and fuel prices. This raised the odds of an interest rate hike by the RBI early next month to tame prices. While factory output measured in terms of the index of Industrial Production (IIP) remained subdued at 1.9% in March, some economists feel that another interest rate hike on the heels of a 40 basis points increase last week may slow economic growth.

On the domestic equity market front, the BSE Sensex ended 136.69 points or 0.26% lower at 52,793.62, while the broader NSE Nifty fell 25.85 points or 0.16 percent to 15,782.15. The dollar index, which gauges the greenback’s strength against a basket of six currencies, fell 0.05% to 104.79. According to stock exchange data, foreign institutional investors were net sellers in the capital market last Thursday as they offloaded shares worth over Rs 5,255 crore. Also, Brent crude features, the global oil benchmark, surged 1.56 percent to USD 109.13 per barrel.

Economists Take Ongoing Inflation

According to some economists, even though a depreciated rupee might support exports, it could mean more pain for inflation as the pass-through of imported inflation becomes higher. Keeping global energy prices constant, a 2% depreciation in the rupee leads to 10 basis points increase in headline inflation; after the rupee fell to record lows last week, the RBI surprised markets by raising the key interest rate by 40 basis points to 4.4% to fight inflation, which was the first hike in nearly four years.

According to Sakshi Gupta of HDFC Bank, “the rupee has finally broken away from its comfort zone. Keeping global energy prices constant, a 2% depreciation in the rupee leads to a 10 bps increase in headline inflation, representing only the direct impact on the domestic fuel and energy costs.”

Gupta believes the total impact would be higher if the second-round impact on prices of other goods and services is considered. Chinese Yuan, Japanese Yen, Thai baht, Philippine peso, South African rand, and Indonesian rupiah have also depreciated.

Another economist that shares the same sentiment is Madan Sabnavis. He believes a 5% rupee depreciation will make imports expensive by Rs 3-4 per dollar. So, imported inflation will go up as the cost of coal, oil, edible oil, and gold rises.