The Indian rupee has registered more than 4% gain so far this fiscal year in the backdrop of sustained foreign fund inflows and the Reserve Bank of India's (RBI) dexterous policy manoeuvring, which ensured a solid year for the Indian currency, despite headwinds on the economic front, according to experts.
The rupee is expected to average around 73.50-74 in FY22, as, despite a vaccine, the COVID-19 frenzy still persists and is likely to continue to grapple the foreign exchange market, experts add. FY21 has been a roller-coaster ride for the local unit due to coronavirus.
The pandemic-induced massive sell-off in the stock market led the rupee to breach a record low of 76.90.
However, the optimism over vaccines, easing of lockdown restrictions, infusion of stimulus by governments and central banks all over the world enthused investors with a general sense of optimism, and the rupee vaulted back to the 72 zone.
"Despite headwinds on the economic front and larger-than-anticipated fiscal deficit, the RBI's deft manoeuvring ensured lower yields for the G-secs and substantial accretion to forex (foreign exchange) reserves this year," HDFC Securities Deputy Head (Retail Research) Devarsh Vakil told PTI.
He added that the rupee is up by 4% against the US dollar for FY21 despite having much higher interest rates and inflation than the US.
Experts said sustained foreign fund inflows into India's listed stocks ensured a strong year for the Indian currency.
For the current financial year, foreign investors have poured in $35.22 billion, the biggest inflow since 2014-15. India has attracted the highest-ever foreign direct investment (FDI) inflows at $67.54 billion during the first nine months of the financial year 2020-21.
"The rupee movements were not surprising as the Indian central bank took steps to stem the depreciation bias of the currency through monetary policy and intervening in the forex markets," Reliance Securities Senior Research Analyst Sriram Iyer told the news agency.
The rupee was also supported amid huge inflows into the domestic equity markets, he added.
Rising COVID-19 cases in India and across the world are a major cause of concern for the rupee. But along with that, the factor that will dictate the trend for the rupee is taper tantrum, experts said.
"The Federal Reserve interest rate hike and US tax hike are the major challenges... In our view, Fed won't hike rates this year, but it will indicate a slow and steady tapering of asset purchases before the end of the year, possibly involving a twist which may keep all emerging market currencies including rupee under check," Emkay Global Financial Services Head of Research (Currency) Rahul Gupta told the agency.
Also, the US-China cold war, pick-up in global crude oil prices, increase in India's imports compared to exports, and fears of the current account falling into deficit may also put pressure on the rupee.
"The worst of the pandemic is behind us, and the risk appetite is taking a significant stride higher, but global and local idiosyncrasies will continue to weigh on the Indian rupee for some more time, at least till the time coronavirus is not contained," Gupta added.
Also, the RBI would cap the rupee from appreciating sharply because of export competitiveness. "So the outlook for FY22 will be sideways, and we expect the rupee to see-saw within 70-76, averaging around the 73.50-74 zone," he stated.
In the short-term, the ongoing global risk-off sentiment will weigh on sentiments.
However, the strengthening of oil prices, which could see twin deficits in the form of current and fiscal accounts, will weigh on the currency.
"We expect the currency will be averaging anywhere between 74.50-75 a dollar in the first half FY21-22 amid ongoing global risk-off sentiment," Iyer said.
He added that the long-term weakening trajectory against the dollar will continue as it has weakened over since 2015. "We could see the Indian rupee touch the 76-77 a dollar mark in the second half of FY21-22."
Experts believe the pick-up in global growth and strong vaccine rollouts will keep the risk appetite higher. Besides, the speed at which economic activities recover, India's entry into global bond indices, global risk appetite (FDI and flows into equities) will determine the fate of the currency this year.(With inputs from PTI.)