Heena Naik, Research Analyst – Currency, Angel Broking Ltd
With few days still remaining, the month of April 2021 has become quite a game changer for India. There were waves of volatility seen in the financial markets with Indian Rupee weakening by more than 1.5 percent. Sensex and Nifty too plunged by almost 4.5 to 3.3 percent respectively, in this month.On the contrary, the US Dollar Index fell by almost 2 percent while S&P 500 posted more than 4 percent of gains in this month. This clearly shows that the prime reason for the downfall in Indian equities and currency was more domestic in nature.
Apparently, a new variant of Coronavirus which has a so-called double mutation has led to a tsunami-like surge in cases in India, making it the world’s second worst-hit country. Over the last weekend, a total of 260,813 new cases were reported across the country, taking the total number of confirmed infections to 14.78 million.According to WHO, five states namely Maharashtra, Kerala, Karnataka, Tamil Nadu and Andhra Pradesh contributed more than 55% of total cases. This devastating expansion of the outbreak continues to overwhelm the health infrastructure, cremation and burial grounds in most states in the country. Due to this, strict restrictions and lockdowns have been imposed across the states which has spooked investors of more economic pain leading to a massive across-the-board selling. As per reports, FPI’s have pulled out a net Rs 4,615 crore from Indian markets in April so far.
Apart from the above reason, another factor that played with the markets was the RBI Policy Statement.The committee decided to keep the repo rate unchanged at 4 percent and retained its ‘accommodative’ policy stance as long as necessary to sustain growth on a durable basis. The Central Bank also pledged to buy up to Rs 1 lakh crore of bonds in Q1 of FY22 to cap borrowing costs and to support the economy’s recovery sending a wave of relief through the sovereign debt market.A day before the policy meet i.e. 6th April’21, the 10-year Indian bench mark yields was trading at 6.12 percent. Post the policy meet following RBI’s explicit assurance of debt purchases, the same 10-year benchmark yields plunged towards 6.01 percent within two days. On the contrary, the Indian Rupee weakened sharply from thereon crossing 75.00 levels as the dovish stance by the RBI was seen diverging with other hawkish emerging markets central banks like Turkey, Russia, and Brazil. A lot of traders who were expecting Rupee to appreciate had built up a lot of carry trades however post the policy release foreign portfolio investors chose to unwind some of these positions, leading to a depreciation in the currency.
All of the above factors has kept the local unit under pressure terming it as one of Asia’s worst performing currency in April’21. There is a possibility that this weakness shall continue for some more time leading the currency to cross 76 levels in the near term soon. The India government’s effort of controlling the rising Coronavirus cases by providing vaccination to all citizens above the age of 18 from May 1 could provide some initial relief. But one should not forget that this process will not immediately control the cases. It will take weeks and months to control the pandemic. Also, the newer restriction and lockdowns has already weakened the economic activities and will worsen it more causing more outflows. The RBI, on the other hand, is trying and will try hard to suppress this huge volatility in Rupee by persistently intervening via state-owned banks but they have their own limitations.
With many top-notch banks and brokerage houses downgrading India’s GDP forecasts for FY22, it is important for the country to bring the covid-19 cases under control to avoid further revisions which could invariably affect local equities and the Indian Rupee.
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