During the previous week, the Indian rupee showed tremendous strength and closed near the Rs.73.13/$ mark. This has been one of the best weeks for the INR in the last 2 years and the rupee has touched the pre-COVID levels with little effort. What exactly has led to sudden strength in the INR? Actually, there are four key factors at play.
New FDI Policy gives a boost
The strength in the INR was visible from the time the government announced its defence in-sourcing policy. While it was likely to result in orders of Rs.3 trillion for Indian defence companies, there was a much bigger twist. It was likely to set the tone for an aggressive “Make in India” push, which had the potential of weaning away manufacturing capacity from China. It would also position India in the global supply chain. The result could be massive FDI influx into India.
Blame it on the Dollar Index
One reason for the rupee strength is the sudden weakness in the Dollar Index or the DXY. This weakened by 15% since Mar-20 and has been reflective of the economic slowdown in the US, the weak consumer spending scene and the huge debasement of the dollar as a result of the monetary easing taken up by the Federal Reserve. Also, the trade war with the US was not doing any good for the US economy, with stock markets diverging from the economic reality.
FII flows are robust
While the previous months were fairly tentative in terms of FII inflows, August has seen a big shift. Foreign investors have infused close to $6.5 billion into Indian equities in the four weeks of Aug-20. This was triggered by the Fed minutes, which hinted at rates staying close to zero for the next five years. That has also been borne by the MPF presented by the Fed Chair. The big impact is that it has once again created risk-on sentiment in the market and that has led to massive FII inflows into India in August. FIIs have also been enthused by the combination of a likely growth recovery in the Indian economy as well as a strong rupee holding dollar gains. This virtuous cycle helped the INR.
RBI intervenes less
In the past, the RBI had been touchy about letting the rupee appreciate as it would weaken the exports engine. With Indian exports continuing to be under pressure due to weak global demand, the RBI has rightly decided to allow the rupee to find its own level. That has also strengthened the INR as RBI dollar buying is not hindering rupee strength any longer. A strong rupee at this point will help to keep the import bill under check and also give confidence to the portfolio investors to commit money into India. It is this amalgam that is actually keeping the INR strong. A lot will now depend on economic recovery! ©