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The Indian rupee has had a stable run this year, but UBS expects it will be ‘short-lived’

  • UBS strategists expect the Indian currency to weaken to 77 per dollar by the end of the year — more than 5% weaker than current levels — and depreciate further to 79.5 by September 2022.
  • The rupee's resilience has primarily been because of two reasons: first, foreign fund flows into the Indian market and second, the Reserve Bank of India's management of the volatility, according to Gaurang Somaiya from Motilal Oswal.
  • British bank HSBC expects the rupee to hold up "relatively well" in a stronger dollar environment as persistent FDI inflows and better foreign-exchange reserves will help the currency withstand external headwinds.

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Indian currency notes of Rs 2,000, Rs 500 and Rs 200 denominations.Nasir Kachroo | NurPhoto | Getty Images

The Indian rupee has been one of the most stable currencies in Asia-Pacific this year, but its stability is expected to be short-lived, according to UBS.

Strategists from the Swiss investment bank said in a note dated Aug. 25 that they expect the Indian currency to weaken to 77 per dollar by the end of the year — more than 5% weaker than current levels — and depreciate further to 79.5 by September 2022.

"We see the year-to-date INR stability as short-lived," UBS said, adding that a retreat in U.S. bond yields lent stability to currencies like the rupee.

The rupee changed hands at around 72.98 per dollar on Friday, strengthening some 0.19% from January levels and appreciating from levels around 74.11 last month.

What kept the rupee resilient?

The rupee's resilience has been primarily driven by two factors, according to Gaurang Somaiya, a foreign-exchange analyst at the Mumbai-based diversified financial services firm Motilal Oswal.

"First, consistent fund flows was positive for the rupee and second was the [Reserve Bank of India] bought dollars to build its reserves and prepare itself for any volatility," he told CNBC.

Somaiya added that fund flows were not only led by the foreign institutional investors but also through a consistent stream of foreign direct investments.

FDI equity inflow into India grew 168% on-year to $17.57 billion between April and June — the first quarter in India's fiscal year 2022. That refers to foreign money invested into Indian markets as well as businesses and is free of debt.

"Fund flows have been one of the major reasons that helped the rupee gain steadily," Somaiya said. He pointed out that between August last year and now, the rupee has been stuck in a relatively broad range of 72 and 75 against the dollar.

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