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Nirmal Bang Report
Near term appreciation bias does not belie long term depreciation trend -
We had highlighted in the past that post the taper tantrum of 2013, the sensitivity of the Indian rupee to portfolio flows has increased.
We had also highlighted in our report – Who moved my liquidity? – that India is among the emerging markets (EMs) likely to benefit from flows on account of the unprecedented expansion of balance sheets undertaken by the G3 central banks in the wake of the Covid-19 crisis.
Foreign portfolio investment (FPI) flows into Indian equities picked up between May and July and hit near record high of 6.3 billion U.S. dollar on a monthly basis in August.
This in our view has been a major factor behind the India rupee’s appreciation.
For sure, FPI flows had seen a turnaround in the previous three months and foreign direct investment (FDI) was largely stable, but Indian rupee appreciation was curtailed to a large extent by the Reserve Bank of India’s reserve accumulation.
The dollar index has also come under pressure in the past two months, but has only been marginally supportive of EM currencies.
At the same time, we are not of the view that this depreciation is a death knell for the dollar as a reserve currency mainly because of lack of a tenable alternative.
The expansion of the U.S. Federal Reserve’s balance sheet has led to some consolidation in the dollar, after the initial risk-off trade supported a stronger dollar.
We also do not believe that apart from a sentimental boost, dollar depreciation alone can support Indian rupee appreciation if not backed by flows.
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