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India’s rupee hit its highest level in six months on Friday making it one of the more successful forex trends of the summer. Foreign investors have been buying into Indian equities aggressively and there has been a consequent rise in the rupee against the USD.


We saw a 2% gain in the rupee last week, in what traders are saying is the Indian currency’s biggest one week rise since the end of 2018. All eyes are on the country’s central bank, the Reserve Bank of India, which is known to be buying dollars in an effort to prevent the rupee from gaining too much.

This is all against the background of the aggressive spread of COVID-19 in India. There are further tensions emerging on India’s contested border with China, which might also put a dampener on things.

Foreign buyers are piling into Indian stocks

Foreign portfolio investors – FPIs – had been on a buying spree in Indian stocks in August. Traders in Mumbai say they expect yet more inflows in September with the US Federal Reserve indicating last week it would be keeping US rates near zero for the foreseeable future. This is putting the RBI in a position where it needs to keep buying dollars to compensate. According to Barclays, India’s foreign currency reserves are anticipated to rise from $567bn to $642bn by the end of FY 2021/22.

Currency traders remain a little edgy about reports of Chinese troops in the Ladakh region violating a previously esttablished ‘consensus’ over the weekend. This week, much will depend on news flow from that situation: if it proves to be a one off report, then expect further bullish moves from the rupee.

Like many other economies, India’s has been suffering as a consequence of the lockdown prompted by the virus. There was a steep decline in GDP for the quarter starting in April, with a collapse of 23.9%. India’s economy had already been stuttering going into Q1. Most sectors were reported down, except agriculture, which posted a 3.4% gain for the quarter.

Indian manufacturing was in recession before COVID

The big worry for investors will be the manufacturing sector, which has seen four quarters of consecutive contraction and is technically in recession. Overall, India’s economy looks to be really suffering from the coronavirus effect, with a bigger contraction even than the UK. India is employing aggressive fiscal stimulus and free food for the poor in an effort to combat the effects of the virus, but some economists are arguing that more needs to be done by the RBI to shore up the economy in the near term.

What is driving foreign enthusiasm then? A lack of yield in developed markets has to be one factor, plus Indian assets still look cheap as the rupee is still well down on where it ought to be against USD or EUR. This is having the effect of pushing up the rupee, potentially while the RBI distracted with other issues related to the economy.

India’s Sensex gave up 2% on Monday over the reports of border scuffles. Most of the constituents ended up in the red. India’s VIX index saw a gain of 25%. Markets are obviously very jittery about the military situation in Ladakh, but we think this is being overplayed.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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