Indian Rupee Gains May Not Last After Banking System Dollar Glut, USD/INR Eyes CPI

The Indian Rupee has been performing remarkably well in recent weeks considering India’s recent deadly wave of the coronavirus. Over 400,000 cases were reported earlier this week, a record. This risks pouring cold water on expectations of stellar economic growth. The International Monetary Fund recently estimated that the country could see a breathtaking 12.5% GDP growth rate this year.

It should be noted that while India is experiencing grim conditions, the rate of daily case growth has been slowing – see chart below. Having said that, the figures remain elevated. The Nifty 50, the nation’s benchmark stock index, remains unhinged all things considered. While prices have not sold off, the Nifty has been consolidating since January. What could explain the divergence between price action and Covid cases?



Indian Rupee Gains May Not Last After Banking System Dollar Glut, USD/INR Eyes CPI

For one thing, Prime Minister Narendra Modi has been reluctant to take drastic measures, such as a nationwide lockdown. He noted that states should only consider lockdowns as a last resort. Meanwhile, the Reserve Bank of India (RBI) just announced additional emergency measures to help support the economy. One of these items includes a second tranche of bond purchases totaling about INR350 billion.

The RBI also announced an ‘on tap liquidity’ window worth roughly INR500b to extend credit to health services and vaccine makers. Governor Shaktikanta Das noted that the outlook is highly uncertain and that the central bank stands in ‘battle readiness’. The central bank’s action is helping to pressure longer-term sovereign debt yields lower, keeping default woes at bay.

These may be keeping risk appetite intact, something that is important for the sentiment-sensitive Rupee. Having said that, USD/INR has been on a wild ride as of late. Last month, the pair soared amid a very dovish RBI monetary policy announcement that marginally cooled tapering expectations. Now, the pair is falling fairly swiftly. This could be due to a temporary glut of dollars in the banking system.

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