The USD-INR pair continued to witness pressure when the Indian economy started to accumulate foreign investments during early February 2019.
Foreign investors have infused more than Rs 66,000 crore in calendar year 2019 till date. With no surprise the largest dollar inflows were seen during the month of March. Traditionally, dollar capital flows will be high in March when compared with the rest of the month, foreign portfolio investors have pumped in $7.033 billion in March 2019. Moreover, there is also a phenomena of witnessing large dollar inflows during the period of general elections. Foreign investors have made a net investment of $9.477 billion YTD 2019 and $5.743 and $ 0.6 billion in 2014 and 2009, respectively. Although, the Reserve Bank of India made an attempt to dilute the effect of inflows on the rupee by introducing a couple of dollar buy/sell swap agreements of $5 billion each, it failed to restrict the rupee gains as the amount was lesser than the inflows.
Historical data suggests the current positive inflows will continue even after the elections which would further add gains to the rupee. However, any policy action by the central bank to support the USD-INR pair and announcement of dollar buy/sell swap agreements would restrict the rupee’s gains.
The author is a fundamental research analyst at Karvy Forex & Currencies Pvt. Ltd.