Rupee beats most Asian rivals, as the inflows surge

The rupee had been under considerable pressure in the last one year as it weakened from around the 74/$ levels in early 2022 to 82/$ level by end of 2022. Rupee seems to have taken support around that level as the rupee has gradually strengthened in sync with the weakness in the US dollar. It is not just the dollar weakness. Even flows into India have been a lot more positive in terms of FPI flows in March and April 2023 and that has also helped the rupee become among the best performing currencies among emerging Asian markets. Now, reports suggest that the Indian rupee may actually look to appreciate a lot further versus the US dollar. This would be partially helped by the dollar weakness and partly by the dollar inflows into India, something other Asian EMs cannot rally boast of.

The RBI had been for long supporting the rupee around 82/$, but has not needed to support too aggressively of late. The non-deliverable forwards or the NDF market indicates that the rupee would remain in the range of 81.70 to 81.75 to the US dollar. In the current week, the mega IPO of Mankind Pharma got a very strong response. Apart from the institutions absorbing 30% of the offer in the anchor allocation, the unallocated QIB portion got subscribed 20 times by the QIBs. That is a lot of forex inflows implied and that has also led to sharp appreciation in the Indian rupee. That had led to sizeable (dollar) offers (from foreign banks) and the Reserve Bank of India not being there is a clear signal that the rupee has enough legs to strengthen on its own.

However, the RBI normally does not like too much of volatility in the rupee dollar exchange rate and intervenes both ways. Hence, things could quickly change very rapidly if the RBI decides to intervene and not allow more downside on the USD/INR. One of the challenges that flows into India would face is the relatively higher valuations of Indian stocks as compared to their Asian peers. However, it is also a fact that most of the Asian shares struggled for direction following losses on the S&P 500 Index. Currencies like the Chinese Yuan and the Korean Won have continued to be weak against the dollar. The question is, can FPI flows into India continue when EM appetite is so weak among the investors.

One of the main reasons for dollar index slipping of late is the upbeat euro. Interestingly, while the dollar has suffered due to the burgeoning banking crisis in the US, the resilient economy of Europe has been a stand-out performer. The latest first advance estimate of Q1GDP in the US has come in sharply lower at just 1.1% raising fears that the contagion was really starting to hurt the US economy. To top it all, the debt ceiling is back in the reckoning and that puts a lot of uncertainty in the affairs of the United States.

The US House of Representatives on Wednesday just about narrowly passed a bill to raise the government's $31.4 trillion debt ceiling. However, this raising of the debt ceiling comes with some sweeping spending cuts over the next decade. The bill is unlikely to pass the Senate and could also include some more stringent taxes on the rich, something that the market does not usually like too much. However, the focus would be on the finer points of the GDP advance estimates in the US, which has bene a negative surprise. The new orders for US-manufactured capital goods fell more than was anticipated for the March 2023 quarter and even shipments had fallen sharply. In addition, the slowing of business fixed investments remains a big risk. Clearly, the rupee is having a good time.