Rupee Slips Marginally As Mixed Flows Keep Movement Range-Bound

The USD-INR exchange rate dipped slightly to close around ₹90.6925 by late Monday morning. There were no large directional moves due to counterflows, resulting in a trade range of 8 paise in early sessions. Early morning boosts from the US-India trade agreement faded out, and focus shifted to domestic portfolio flows and exporters' hedging.

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The rupee has recently stabilised after recovering from lower levels near 92. External factors are playing a lesser role than the domestic market drivers. In the absence of further catalysts, the positive momentum from the trade agreement has dissipated, and the rupee is following the relatively well-defined near-term flows.

Trade Deal Optimism Wanes

The rupee received support with the foreign portfolio inflows that followed the trade deal; however, the net purchases by investors this month marked a departure from the outflows experienced in January. An 800+ million dollar equity pullout on Friday illustrates the flow volatility within the market. In addition, exporters' sales have supported the currency, but their frequency of activity has moderated since the agreement.

As exporters have hedged during the rupee's recovery phase, further hedging activity will be closely monitored as the rupee is approaching very near-term levels, and the exporters will be monitored closely as of now.

External Supports Provide Floor

Yields in the U.S. fell after the release of weaker-than-expected inflation data. As a result, the offshore Chinese yuan has risen to 6.8858 versus the dollar. Currencies in Asia tend to move higher from external market events, but those trends will be limited due to domestic factors. The influence of major regional currency movements will continue to be overshadowed by local forces, with most traders focused on positioning and hedging to offset any local impact.

Banks report that market psychology is heavily influenced by expectations around central bank intervention. This means that price discovery will be driven by the local market dynamics rather than any overall global trend. Equity flows and exporter flows will remain the most important areas to monitor moving forward. Currency is likely to navigate through a balanced positioning environment.

Domestic Drivers Take Precedence

Many traders are currently focused on portfolio inflows and hedging activity, with current exporter interest remaining important. The rupee should remain within a relatively narrow range as it opens this morning. There are a number of countervailing forces at work, and most have neutralised directional pressure. 

The transition from the initial phase of the trade deal to the flow phase will have little impact on prices; however, support from outside forces (e.g. declines in yields) will provide an overall stable base for price levels. The market continues to look for new triggers; however, as positioning has stabilised, no major triggers will likely be discovered in the near term due to the presence of central banks in the market.