Despite US Fed pressure and inflow challenges, here's why the Indian rupee is a bright spot

“There is no change in outlook for rupee due to Fed hawkishness. In fact, India has been doing really well on all fronts,” said Anil Kumar Bhansali, Head of Treasury, Finrex Treasury Advisors.

“The problem for India is inflows, which have stopped. As inflows came in March we saw the rupee moving up to 81.63. It's going to be a two-way market till talks of inflation and interest rate hikes continue. My take is 81-83 with RBI protecting at both ends.”

‘Biggest risks to the rupee are inflows which have dwindled down to near zero as FPIs continue to sell. Due to Fed rate hikes, they are getting better rates into currencies with least risk like USD,” Bhansali, from Finrex Treasury Advisors added.

“Second biggest risk is prices of oil moving up higher. The third risk is an escalation of conflict in Ukraine as Russia continues its offensive and the fourth risk is a fall in exports due to recession lingering in different parts of the world."

India's foreign currency reserves stood at a five-month high in January.

“After net dollar purchases in Nov-Dec ‘22 and likely in Jan ‘23, the RBI is expected to have switched to dollar sales since Feb to defend one-sided weakness in the rupee and keep intraday volatility in check,” said Radhika Rao, Senior Economist at DBS Bank.

“Rebuilding foreign reserves is likely to face two steps forward one step back move, justifying the central bank’s proactive stance on rebuilding its buffer. This might keep the USD/INR from decisively breaking above 83.0, notwithstanding a bid dollar tone.”

India’s forex reserves fell in 2022 as the RBI intervened to protect the rupee, which weakened past 83 against the dollar in October. Reserves in Asia’s third-largest economy started rising again later last year as major currencies strengthened against the dollar.

Last year, the rupee slid nearly 10 percent against the dollar and breached the 83 mark in October, a record low but since then it has strengthened despite a volatile macro environment, threats from the ongoing Russia-Ukraine war and global investors swaying towards the safe haven– US dollar.

Most emerging market currencies along with the rupee came under pressure after Fed Chair Jerome Powell reaffirmed that the Fed is determined to bring inflation down to its 2 percent target and an aggressive rate hike cycle will possibly continue to slow the stubbornly high inflation in the US.

Back home, the RBI will most probably follow the US central bank’s footsteps and keep tightening in order to tame the red-hot inflation.

That is despite economic data indicating growth to be below expectations in the last quarter as a gloomy global outlook and rising borrowing costs hurt manufacturing and consumption.

Meanwhile, the Reserve Bank of India has reportedly been selling dollars, both onshore and offshore, to prevent the rupee from weakening below the 83 handle, according to several market participants, and will continue its vigil.