The latest inflation prints may have stunned currency markets observers, but experts remain optimistic about India's currency maintaining its competency vis-a-vis the US dollar. However, the rupee is expected to remain under pressure from rising crude oil prices amid strong US dollar and FPI outflows in June.
Experts do believe the above factors influence the rupee's trajectory hereafter. The central bank intervention alongside the carry trade may come in handy to chart course correction.
"As the rupee appreciated significantly in the month of May, the USD/INR is witnessing short-covering now. The support level of 72.20 for USD/INR worked well and we saw RBI intervention at lower levels to support the exporters," said Amit Sajeja, vice president research - commodities & currencies at Motilal Oswal.
Meanwhile, the dollar rose to a one-month high against a basket of currencies as investors tried to ascertain if the Federal Reserve might alter the language on its stimulus following a recent jump in US inflation.
"The USDINR spot remains in the mid-range ahead of the FOMC announcement. If the FOMC pushes back tapering talk, it will dismiss the uptrend in the spot. Otherwise, any hint over the timing of tapering will continue the dollar rally, pushing the USDINR spot higher towards the crucial resistance of 73.50," said Rahul Gupta, head of research- currency, Emkay Global Financial Services.
He expects consistent trading above that level will push prices towards 73.60-73.75, however, a reversal may bring the spot back to the 72.75-73 zone.
However, a sharp jump in crude oil prices continues to weigh on the local currency.
Oil prices extended their run of gains on Wednesday, climbing towards $75 a barrel to its highest since April 2019, supported by a recovery in demand from the pandemic and a drop in US crude inventories.
Meanwhile, India’s stable macroeconomic condition with forex reserves at a record high and hopes of inflation cooling down going ahead will support the rupee.
The country’s foreign exchange reserves crossed the $600 billion mark for the first time after increasing by $6.842 billion in the week ended June 4, RBI data showed.
"Crude prices may sustain the upward trajectory going ahead, but the RBI is also expected to intervene if the rupee continues to weaken. However, the rupee would not go out of control due to robust forex reserves, CAD under control, support from RBI for fiscal deficit financing, and stable bond yields,” Sajeja said.
He expects the rupee to trade in the range of 72-75 per dollar in the next six-month period.