The Indian rupee will depend on central bank intervention to defend the currency on Wednesday, amid likely foreign portfolio outflows following the unexpected outcome of the country’s general elections.
Non-deliverable forwards indicate that the rupee will open largely unchanged from 83.53 in the previous session. The rupee is not far off its all-time low of 83.5750 in April.
The rupee posted its biggest single-day percentage decline in a year on Tuesday after the smaller-than-expected victory of the alliance led by Prime Minister Narendra Modi prompted foreign investors to dump Indian stocks.
Foreign institutional investors sold a record $1.5 worth of Indian stocks on Tuesday, preliminary data from the National Stock Exchange showed. The NSE Nifty 50 and S&P BSE Sensex posted their worst day in over four years.
The rupee’s losses would have been higher had it not been for the Reserve Bank of India, which probably sold dollars around 83.50. This is expected to remain the case in the coming days, traders say.
The rupee’s volatility is likely to be “smoothed out for now, but medium-term questions have emerged,” HSBC Bank said in a note.
“Beyond the immediate risk of portfolio outflows and loss of carry trade due to election uncertainty, we see potential medium-term impacts from the election outcome,” said Pranjul Bhandari, chief economist for India and Indonesia at HSBC.
The trend of more moderate depreciation in the INR NEER (Nominal Effective Exchange Rate) in recent years may not continue as changes take place in the structural reform agenda and the RBI may be more determined to build large foreign exchange reserve buffers, it said she.
The rupee’s Asian counterparts were mostly higher on the day on the increasing likelihood that the Federal Reserve will cut interest rates in September.
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First print: June 5, 2024 | 9:18 am IST