Weak FII inflow continues to keep up pressure on rupee

Total investments dropped to Rs 24,564 crore in February.

Weakening flows from foreign institutional Investors (FIIs) is likely to keep the rupee under pressure till this month end. In January 2015, the total FII (equity and debt) investments was Rs 33,688 crore while in February it reduced to Rs 24,564 crore. In the last one week, it has been Rs 10,300 crore as FIIs are hedging their positions. In addition with the financial year coming to an end, there would be a lot of selling from exporters that may cap the dollar-rupee to 64 levels and bring it down to 62 levels by March end. As a result the rupee is expected to remain range bound over the next few weeks said currency experts.

RBI last week cut the repo rate for the second time in less than two months by 25 basis points to 7.5 per cent on the back of slowing inflation and a government commitment to fiscal discipline. After the RBI cut rates, initially the rupee popped to 61.70 levels but it was short-lived, as it closed the week around 62.20 levels, onshore and around 62.80 levels, offshore.

The RBI in its policy statement said that “a strong rupee is undesirable” to protect exports. India’s overall exports for January contracted by 11.9 per cent to $ 23.88 billion, the steepest in two and half years. The country’s trade deficit was $ 8.32 billion January data showed. Traders said that the RBI was seen supporting the rupee at 61.90-62 levels by buying dollars.

“The RBI has been buying constantly since the dollar dipped below the level of 62. In the non deliverable forward market the rupee has depreciated to 62.80 levels on Friday,” said a trader.

According to Ashutosh Khajuria, president treasury and head of network, Federal Bank told FC, “The yen, euro and sterling have depreciated against the dollar by more than 10 per cent in a year while the rupee has depreciated by only 3 per cent against the dollar from 59.95 levels in March 2014 to 61.85 recently. As a result, the rupee has actually appreciated in the basket of 36 currencies and also in the second basket of six currencies.”

“While the FII flows are positive they have fallen in February and are at lower levels in the first week of March as a result the impact is not positive on the rupee. We expect the rupee to be around 62 to 64 levels till the next policy on April 7,” added Khajuria.

Soon after the Union budget, the rupee had touched a high of 61.70. Anindya Banerjee, currency analyst, Kotak Securities told FC, “The RBI rate cut has come at a time when the market was expecting a US interest rate hike. The fear of a US interest rate hike could have been offset if the debt or equity market had rallied but both have fallen due to risk aversion resulting in rupee depreciation”

The US dollar rallied by 2-3 per cent right after the ECB meeting on Thursday in the last two sessions. The US job data on Friday gave a boost to the dollar which touched a 12-year high versus a trade-weighted basket of six majors. Non-farm employers added 295,000 jobs in February as per data from the US department of labour, up from 239,000 in January and compared to market expectations of 240,000.

“Going forward, the rupee weakness will continue to remain over the next few weeks. The rupee will depreciate to 63.5 to 64 levels as the strong upfront in the $ will spill over into the rupee. There will be a possible risk aversion in the domestic equity market. Also we are approaching year end and there would be a lot of selling from exporters that may cap the dollar-rupee to 64 levels and bring it down to 62 levels by March end,” added Banerjee. As on February 27, 2015, the total reserves with RBI stood at $ 338 billion. On a year to date basis the reserves increased by $ 43.7 billion.

According to India Forex Advisors, the overall trend for the rupee is range bound between 61.50 to 62.50 levels with a slight weaker bias for rupee.

With Friday being closed, the Sensex had opened firmly higher 29,533.42 and fluctuated between a high of 30,024.74 and a low of 29,162.47 before finishing at 29,448.95, posting a gain of 87.45 points, or 0.30 per cent. Similarly, the broad-based 50-share CNX Nifty of the NSE also overpowered a new peak of 9,119.20 and a fresh low of 8,849.35 before rebounding to finish at 8,937.75, showing a rise of 35.90 points, or 0.40 per cent.