Currency Watch! GDP boost, flow cushion to strengthen rupee

Better-than-expected Q2FY21 GDP figures along with consistent foreign fund inflows are expected to strengthen the rupee during the truncated trade week ahead.

However, the upcoming monetary policy review as well as build-up of India`s forex reserves are likely to arrest any sharp appreciation bias in the rupee.

Recent data showed that India`s Foreign exchange reserves rose $2.51 billion during the week ending November 20 to reach $575.29 billion.

"The RBI has been intervening in forwards and absorbing dollars without impacting liquidity and therefore augmenting reserves," said Sajal Gupta, Head, Forex and Rates, Edelweiss Securities.

The RBI is known to enter the markets via intermediaries to either sell or buy US dollars to keep the rupee in a stable orbit.

"`Operation Twist` is helping to control long-term yields at lower rates. Short-term rates have touched a low of 2 per cent as well indicating ample liquidity which is also pushing up risk assets."

The RBI`s Monetary Policy Committee (MPC) would conduct the last monetary policy review of the calendar year 2020 on December 4.

"In the coming week, we expect momentum for the rupee to also continue as the dollar weakened against its major crosses," said Gaurang Somaiya, Forex and Bullion Analyst for Motilal Oswal Financial Services

"Market participants will be keeping an eye on the RBI policy statement, expectation is that the Central bank could remain dovish on rates, thereby, restricting major appreciation for the currency."

The expectations of a faster economic recovery along with better-than-expected Q2FY21 GDP numbers would keep foreign funds attracted to domestic equity indices, thereby, supporting the rupee.

According to Devarsh Vakil, Deputy Head of Research at HDFC Securities,"India`s Gross Domestic Product (GDP) contracted 7.5 per cent in the July-September period, as the economy rebounded from a record slump of 23.9 per cent in the previous quarter due to slowdown caused by the coronavirus pandemic."

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"This number is higher than what the market has factored in and will help the rupee to open higher on Tuesday. We expect Rupee-Dollar pair to consolidate between the range of 73.6 to 74 for the next holiday shortened week."