The Indian rupee is the best-performing currency in Asia so far this year, underpinned by factors like a reduction in the current account deficit and strong foreign exchange reserves.
The rupee has appreciated 0.48% on a year-to-date basis, compared to a 1.91% rise in the U.S. Dollar Index, according to Bloomberg data.
The local currency has exhibited resilience, rebounding from its perceived low of Rs 83.50 against the dollar and currently indicating signs of a sustained upward trend.
A pivotal factor in bolstering the rupee is the narrowing of the CAD, which is expected to transition into a modest surplus within the next two years, according to Yes Securities (India) Ltd.
"This shift is propelled by governmental initiatives incentivising outbound shipments, targeting a combined $2 trillion value in merchandise and service exports by FY30," it said in a Feb. 26 note.
The Reserve Bank of India's intervention aims to maintain stability, and the overall outlook suggests a potentially appreciating rupee in the years ahead, with projections of it reaching the 78 mark by the financial year 2026, according to Yes Securities.
The rupee has been moving in a small range in the last two weeks as inflows from foreign portfolio investors, mainly in respect of debt, have kept it well-bid, according to Anil Bhansali, executive director at Finrex Treasury Advisors LLP.
The RBI, which has an interest in protecting exporters from competition from peers, has been buying dollars and keeping the rupee in a broad range of Rs 82.70–83.30 and a narrow range of Rs 82.90–83.10, Bhansali said. "This is keeping the rupee steady with small gains."
With the upcoming general election and India's inclusion in JP Morgan's Government Bond Index-Emerging Markets, the rupee is expected to gain towards Rs 82.50 with the central bank absorbing the flows, according to Bhansali.
The stability of the rupee can be attributed to several factors, including consistent RBI intervention, robust growth in the gross domestic product, sustained structural long-term development and a stable bond index, according to Ritesh Bhansali, director at Mecklai Financial Services.
The CAD remains stable, contributing to the overall resilience of the currency, he said.
"The rupee is currently positioned within a broader range, awaiting significant developments in the economy, such as elections or global events," Jateen Trivedi, research analyst at LKP Securities Ltd., said. "Despite global uncertainties, the rupee has performed relatively well, with only major domestic events expected to impact its movement."
Historically, rupee trends have been shaped by inflation disparities between India and the US. However, with narrowing differentials and Indian inflation rates falling below the global average, the scope for rupee depreciation diminishes, according to Yes Securities.
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