Mumbai: The Federal Reserve’s signals of a softer policy environment in 2024 have boosted most Asian currencies versus the dollar, but the rupee’s gains have paled in comparison as the Indian central bank looks to build a reserves buffer and preserve export competitiveness amid a global scarcity of the greenback.
On Thursday, the rupee closed at 83.3275 per US dollar, just 0.09% stronger than 83.4025/$1 at previous close. Meanwhile, currencies such as the Thai baht and the South Korean won notched up gains of around 2% versus the US dollar on Thursday while the Indonesian rupiah strengthened 1%, Bloomberg data showed.
The Malaysian ringgit, the Taiwanese dollar, the Chinese yuan, the Philippine peso, and the Singapore dollar also outstripped the rupee’s gains on Thursday, with the domestic currency extending the underperformance it showed versus its Asian peers last month. In November, the rupee shed 0.17% versus the dollar while eleven other Asian currencies appreciated, the data showed.
The rupee’s lacklustre performance comes despite strong overseas portfolio investment flows into Indian capital over the past couple of months, with analysts saying that the Reserve Bank of India would have looked to absorb the flows and build up its buffer of reserves in an uncertain global environment.”We track flows very carefully and the rupee’s action has not been determined by market flows. It is more to do with the central bank. At this level, it believes that it needs to replenish reserves. One of the factors is that the quality of reserves has deteriorated,” said HDFC Bank’s chief economist Abheek Barua.
“Most of the reserve build-up has been on the back of portfolio flows. FDI has been very sparse. So, I think the RBI possibly wants to keep its reserve chest buffered because 2024 is a very tricky year in terms of global politics,” he said.
NSDL data showed that foreign investment in Indian equities was at $1.1 billion in November and $4.7 billion so far in December. Debt investment was at $1.8 billion in November and $887 million so far in December, the data showed.
From November 3 to December 1, the RBI’s foreign exchange reserves have climbed $13.26 billion to $604.04 billion. The increase in reserves includes the impact of revaluation due to dollar weakness.
“The RBI’s build-up of reserves removes a key aspect of imported inflation, the exchange rate. In a tough fight with inflation, this provides a semblance of predictability on imported inflation. It also provides visibility to foreign trade and transaction participants,” said Dhiraj Nim, FX strategist at ANZ, predicting a gradual appreciation for the rupee to 82.50/$1 by December 2024.
Traders said that the rupee’s underperformance was also driven by persistent dollar demand from importers in an environment of scarce dollars globally due to the Federal Reserve’s quantitative tightening.
