The Chinese yuan weakened after the country’s central bank caught markets off-guard by lowering interest rates. Currency weakness in the world’s second largest economy typically spills over into other Asian units.
The rupee has hovered near record lows for the past couple of weeks even as the local government debt market has seen large overseas flows on account of inclusion of Indian bonds in a JP Morgan index. This is largely as the RBI has mopped up the dollar flows – as evidenced by the large increase in its reserves so far this month – dealers said.
Analysts also flagged the rupee’s overvaluation against other currencies, pointing out that the phenomenon could be driving the RBI to prevent any appreciation in the currency.
“The bias for the rupee remains one of modest depreciation given that the RBI wants to keep adding to the FX reserve buffer as the governor has indicated quite explicitly. Also, if you look at rupee valuation, the INR REER (Real Effective Exchange Rate) is on the higher side,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.
Latest RBI data showed that the rupee’s trade-weighted REER against a 40-currency basket- was at 106.54 in June 2024, higher than 104.68 a month ago and much higher than 103.65 in January. A reading above 100 indicates overvaluation in the rupee.
“Given the global backdrop of a steady dollar and the potential worries from the yuan depreciation the higher REER would strengthen the RBI’s resolve to ensure the rupee doesn’t appreciate and that means there’s a depreciation bias,” Upadhyay said.
From June 28 onwards – the day of index inclusion – foreign investment in fully accessible Indian government bonds has increased by around $1.5 billion, taking overall debt flows to $1.8 billion so far in July, NSDL data showed. However, the rupee has weakened by around 0.35% this month, LSEG data showed, partly due to volatile crude oil prices and partly due to the RBI’s absorption of US dollars.
As on July 12, the RBI’s foreign exchange reserves were at a record-high of $666.85 billion, up $9.7 billion on week.
“The rupee is expected to be in the range of 83.50 to 83.75/$1. Exporters are advised to take hedges around 83.70 levels, and importers are advised to take hedges below 83.50 levels,” said Ritesh Bhansali, Vice President at Mecklai Financial Services.
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