Despite the steep rise in US yields and a gradual climb in the USD index, the domestic currency strengthened to touch a high of 74.01 on Thursday before ending the week at 74.23. During this month till date, the portfolio inflows into equity, debt and VRR amounted to more than USD 2.7 billion and this combined with the IPO dollar inflows influenced the rupee’s strength to continue and a test of 74.00 is likely on the cards before the end of this month.
We expect the intervention from RBI at close to 74 levels to prevent any sustainable rise in the domestic currency beyond the said level. We believe the RBI will be keen to avoid undue currency volatility and hence their intervention at or below the 74 levels is expected. The fall in the for the fourth consecutive day had little impact on the rupee. We strongly recommend the importers hedge their payables upto end-December 2021 maturities at or near the spot level of 74.00 and the average forward exchange rate shall be beneficial for import payments.
In the background of solid export growth from the beginning of the current financial year, one can expect the Central Bank to maintain a competitive exchange rate to boost export growth and to exceed the exports target of USD 400 billion set by the Government for the current fiscal.
Despite the firmer undertone currently prevailing in the exchange rate, we strongly feel the expectation of rate hikes by the Fed after their completion of tapering by the end of June 2022 shall open up the possibility of one or two rate hikes in the second half of CY 2022 and in the interim period, if the employment growth, GDP growth and inflation parameters satisfy the expectation of Fed, the rate hikes by Fed shall occur, which event can make the rupee to weaken toward the 76 levels more quickly than one can expect at this point in time.