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While the Rupee started FY2020-21 at Rs 75.66 to the Dollar, it finally closed at 73.18, rising 3.3% against the USD. Interestingly, the Dollar Index, which measures the value of the US dollar relative to the value of a basket of currencies of its major trading partners, plunged 5.8% during the year.

Source: Telequote, Ventura securities Ltd

But beyond the devaluing dollar, there were other factors which played Tug-of-War on the Rupee during the year and finally the bulls won. Let’s take a look at the Rupee value influencers and how they behaved during the previous fiscal year year, before we offer a calculated estimation of where we expect the rupee to head in the current one.

The weaker Dollar Index supported the rupee rise

To being with, in FY2020-21, the weaker Dollar index was a major factor that supported the strengthening Rupee.  This index is a major determinant of the strength of the Rupee as any appreciation or deprecation in it may impact the USD/INR exchange rate.

The strength of the Rupee is usually negatively correlated with the rise and fall of the Dollar Index. During the year gone by, the Dollar Index depreciated by 5.8%, weakened by lower interest rates and the larger fiscal stimulus. During the same period, the Rupee appreciated against the Dollar by 3.3%.

Higher FII /FPI money inflows boosted the Rupee

Indian markets (Equities & Debt) received over Rs 2.23 lakh crores from foreign institutional investors in FY2020-21. This was the highest flow to any major emerging market during that period and greater than the cumulative inflows of the last six years.

FII inflows increased mainly due to weakness in dollar index and during the same period Nifty outperformed by 71%, delivering its highest returns in the past 10 years.

Source: NSDL, Telequote, Ventura Securities Ltd

Generally speaking, when the Dollar index weakens the Rupee rises against the USD, and vice-versa. In the event of a falling USD-Rupee, Foreign Institutional Investors (FII) and Foreign Portfolios Investors (FPI) enjoy better returns on their dollar investments.

With strong forex reserves RBI has room and resources to support any fall in the Rupee

According to an RBI report dated 05th Feb 2021, Indian foreign exchange reserves touched a record high of USD 590.18 billion in the week ended January 29. The country’s foreign-exchange reserves surpassed Russia’s, making India the world’s fourth largest reserve holder in the world. China has the largest foreign currency reserves followed by Japan and Switzerland.

India’s foreign exchange reserves were at USD 579.28 billion as of Mar 26, 2021, which translates into a sharp rise of 21.8% over the USD 475.56 billion held at the end of Mar 27, 2020.

Source: RBI, Ventura securities Ltd

Government has been raising excise duty on petroleum products

The Rupee’s appreciation against dollar in FY2020-21 was also supported by higher tax collections by the NDA government. Excise duty imposed on petrol and diesel by the Centre is a major tool that catalyses the rise in fuel prices and the Government has doubled the excise duty on petrol and diesel over the last two years.

According to a recent report by India Today, the government has already collected nearly Rs 3 lakh crore from tax imposed on petrol and diesel in the first 10 months of FY2020-21, which has helped the Rupee appreciation against dollar.

Since the first week of March 2021, in the run up to assembly elections in four states (Assam, Kerala, Tamil Nadu, West Bengal) and one Union territory   - Puducherry, petrol and diesel prices in India have stayed relatively steady. The elections are scheduled to be held between 27 Mar, 2021 and 2 May, 2021, so there is unlikely to be any hike in petrol prices till 2 May 2021.  So the Rupee may see some pressure until the State elections conclude.

Looking ahead, we expect the Rupee to depreciate against the Dollar in FY2021-22. Now, let’s look at some of the major factors that could trigger this downward pressure.

FII inflows are likely to slow down 

Over the past few weeks, FIIs reduced their activity and withdrew money from equity markets mainly due to higher bond yields and the rising Dollar index. Going forward, any further increase in FII outflows from domestic markets will put downside pressure on the Rupee.

FII Equity investment

Source: Money control, Ventura Securities Ltd

The Dollar index is expected to appreciate in FY2021-22
Over the past two months, we noticed the Dollar index strengthened by 2.9% due to higher bond yields and a rebound in the global economy. Any further increase in the Dollar index may put pressure on the Rupee in the coming days.

Source: Telequote, Ventura Securities Ltd

Forex Reserves are decreasing

Over the past two months, India’s Forex reserves declined by USD 10.9 billion to reach USD 579.285 billion after touching a record high of USD 590.185 in the week ended March 26, according to an RBI report published on 2 April, 2021.

Source: Trading economics, Ventura Securities Ltd

India’s Forex Reserves have been declining mainly due to the appreciating Dollar and higher crude oil prices. Moving forward, the RBI will have to dip into its reserves to stabilize the rupee.

At the same time, India’s gold reserves increased by USD 276 million to USD 34.907 billion in the week ended March 26, according to the same RBI report (2 Apr, 2021).

Crude oil prices are rising

Over the past month, Crude Oil Prices (Indian Basket) was trading above USD 64/barrel. India is the second largest importer of crude oil in Asia, after China. As India imports more than 80% of its crude oil requirements, a significant price change in crude oil has a direct effect on India’s current account deficit. Rising crude oil prices could increase India’s inflation and import bills as well.

Source: Petroleum Planning & Analysis Cell, Ventura Securities Ltd

That could, in turn, widen the country’s trade and current account deficits. Going forward, any further increase in crude oil prices may put downside pressure on the Rupee in the coming days.

Source: Trading economics, Ventura securities Ltd.

Higher inflation will hurt the Rupee

For FY2021-22, we expect the inflation rate to increase, mainly due to an increase in the prices of Energy, Base metals and Agri commodities. In general too, commodity prices are surging due to lower interest rates, global stimulus packages and various liquidity measures taken by the RBI and global central banks. Any further surge in commodity prices will increase inflation and that could put pressure on the rupee in the days to come.

Source: Trading economics, Ventura securities Ltd.

Technical outlook for the Rupee

Technically, the USD/INR has formed a descending triangle pattern on the daily charts and we expect the price to face resistance at the both the trend line and the 200-day moving average, which comes around 73.70 levels on a daily closing basis.
According to this pattern, if the price breaks out above the trend, it can head towards target levels of 76.30 to 76.50 over the next two to three months. On the downside, 72.20 will provide strong support in the short to medium term period.

Source: Telequote, Ventura Securities Ltd

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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.


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