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Wednesday, September 23, 2020

Rupee gains nearly 2% in a week: What are the factors driving the upswing?

FPIs have bought Rs 46,602 crore worth of shares so far in August, the highest monthly inflow in calendar year 2020.

Written by George Mathew , Edited by Explained Desk | Mumbai | Updated: August 30, 2020 8:45:00 am
rupee, rupee vs dollar, FPI inflows, FPI inflows in economy, foreign portfolio investors, RBI, Reserve Bank of India, Explained Economics, Express Explained, Indian ExpressFPIs are making use of the interest rate differential to bring in dollars.

The rupee rose nearly two per cent to 73.40 against the US dollar last week as foreign portfolio investors (FPIs) pumped more money into Indian markets and the Reserve Bank of India refrained from intervening in the foreign exchange market.

Why are FPIs pumping money?

FPIs have bought Rs 46,602 crore worth of shares so far in August, the highest monthly inflow in calendar year 2020. FPIs are making use of the interest rate differential to bring in dollars. Analysts said dollar inflows into the stock market and gains in other Asian currencies boosted the rupee’s value. The US Federal Reserve’s recent policy shift towards hotter inflation could further boost inflows and boost the rupee’s value, traders said. Globally, risk sentiments have strengthened on aggressive stimulus by the US Fed and there have been sharp inflows into the stock market. As a result, the Sensex gained over 1,000 points at 39,467.31 last week.

More from Explained | Why RBI sent Rs 73,615 crore to its Contingency Fund

Why is RBI keeping away?

The RBI which bought $ 59.74 billion of forex reserves since April 1 this year to boost the country’s reserves did not intervene in the market to prevent the rupee appreciation in the bygone week.

When the RBI buys dollars, it releases equivalent amount in the rupees into the system which, in turn, could put pressure on inflation and yields. “The sharp fall in USD-rupee spot has been unexpected and traders are in shock. Initially, the RBI was protecting the 74.50 zone but its absence has led to a free fall. The question arises whether can we expect the RBI intervention going ahead or it is comfortable with current levels,” said Rahul Gupta, Head of Research, Emkay Global Financial Services.

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What was the US Fed policy shift?

The US Federal Reserve recently signalled a major shift in its approach to managing inflation in a bid to aid the country’s economy’s recovery. It will now target an “average” of two per cent inflation, rather than making a fixed two per cent target, giving it more flexibility, Fed chief Jerome Powell said. The new policy will allow the bank to keep interest rates lower for longer, stimulating growth to help tackle unemployment. The Fed move will lead to more capital flows to emerging markets like India.

What’s the impact on gold prices?

Gold prices, which had recently retreated from the all-time high levels, rebounded on Friday as traders began to incorporate the Fed’s new policy which is focused on inflation. The dollar moved lower on Friday despite rising US yields, which helped to pave the way for higher gold prices. In Mumbai, gold .999 variety was quoted at Rs 51,177 per 10 gram and gold .916 variety at Rs 46,878 per 10 grams, according to the Indian Bullion and Jewellers Association.

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