Though the dollar strengthened against other major currencies on expectations of faster US economic recovery and surge in bond yields, the USD/INR is still holding a weaker bias.
In anticipation of foreign fund inflows and dollar funds being raised by companies through the ECB route, the currency traders are betting in favor of rupee appreciation. However, the purchase of dollars by oil companies in the background of the rise in crude oil prices in the recent period may weigh on the rupee. The rupee touched a low of 73.77 on 1-3-21 and the currency’s down move proved unsustainable beyond the 72.80 resistance level.
Rupee’s firm bias against the dollar continues and the domestic currency is well supported at 73.30 and 73.50 thereafter. Dollar sales by exporters and corporate dollar inflows into the local market helped the rupee to maintain its firmer undertone against the dollar. During this month, the net portfolio outflow was USD 1.37 billion which includes bond outflows of USD 1.06 billion.
After the Senate approved Joe Biden’s USD 1.9 billion massive spending package concerns arise about inflation pressures. Since late-January 2021, the yield on US 10-year Treasury has risen by more than 60 bps. Fed’s two-day policy meeting on March 17 is awaited for cues on the Fed’s view on the long-term bond yields.
Following the sell-off in global equities in the last week, the market expected a higher depreciation in the rupee to test the 73.50 level but it could not materialize. The stability in the exchange rate around the 73.00 level and the prevailing higher forward dollar premia upto 6-month maturities encouraged the importers to defer their hedges against the import liabilities. The extent of dollar sold positions in the market is increasing which could exert pressure on the domestic currency at some point of time in the future but the huge forward dollar purchase position of RBI could effectively prevent any depreciation in the rupee beyond the 74.00 mark. The importers are feeling comfortable on that premise.
The 10-year US bond yield touched a 1-year peak at 1.6250 pct last Friday as investors continue to price in upbeat prospects for the US economy as well as higher inflation. The 10-year bond yield is now trading at 1.54% after a 3-day drop from the 1-year high of 1.6250%.
Major emerging market currencies have weakened due to dollar rebound and sustainable rise in US yields above 1.5%. If the rise in US yields continues, the riskier currencies may witness a flight of capital from the emerging market towards the US dollar.
During the period from the beginning of 2020 till date, the Taiwanese dollar has appreciated by 5.35%, and the rupee depreciated by 2.21% against the dollar. Among the Asian stock indices, KOSPI registered a whopping rise of 35.42% followed by the Taiwanese Weighted Index by 32.14%. BSE Sensex posted a gain of 22.86% in the abovesaid period.