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RBI buying dollars to absorb surge in foreign fund flows

Date: 23-11-2020
Subject: RBI buying dollars to absorb surge in foreign fund flows
In the holiday-shortened last week, the rupee made a hazy start at 74.44 and weakened towards 74.63. This weakness was primarily due to aggressive dollar buying by nationalized banks along with ongoing fears related to Covid-19.

Markets were initially euphoric on the announcement of two vaccines which boosted the sentiments. This euphoria has been slowly fading away as the vaccines have its own set of logistical requirements of transportation, preservation, and distribution.

Towards the end of the week, USDINR changed its direction and appreciated towards 74.10, closing the week at 74.16 due to broad dollar weakness and suspected foreign inflows. US Dollar Index weakened throughout the week on reports that US Senate Republican leaders have agreed to resume negotiations on another coronavirus stimulus package.

In a bid to prevent the rupee’s appreciation, the Reserve Bank of India (RBI) has been regularly buying dollars, absorbing the surge in foreign fund flows. Foreign equity inflows this month rose to Rs 49426 crore while forex reserves swelled by $4.277 billion to a lifetime high of $572.771 billion. It looks like the central bank is not in the mood to allow USDINR to appreciate sharply.

In the coming days, the rupee is expected to weaken slightly considering the new restrictions imposed in Mumbai along with other parts of India. Moreover, global equities too look dim on the back of weak global cues due to rising coronavirus infections in the western world and on-off stimulus talks. On the flipside, a lot of inflows and IPOs are expected to grace the markets. Data shows that compared to other emerging markets, India was the only economy that received positive net inflows for Rs 10,107 crore over the 12-month period from October 2019 to September 2020. This trend is expected to continue as the Indian equity market has recovered as one of the fastest compared to other global markets.

USDINR is expected to trade within a range of 73.50 – 75.00 levels. On the upside, break of 74.95 could push it to 75.40 level. On the down side, a break below 74.00 could push the currency towards 73.80.


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