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Below are Perspective on Emerging market foreign currencies (EMFX) by Madhavi Arora, Lead Economist, Emkay Global Financial Services

INR's recent upmove looks transient

INR has had a decent year so far in the EMFX space, with March being specifically an outlier one. INR spot returns in March so far have been 1.4%, while all of the EM Asia basket is showing negative spot returns.

A large part of that INR outlier behaviour is attributed to:

(1)    IPO impact: With the huge line up of IPOs and possible robust FPI interest amid oversubscription and constant $ selling pressure in INR offshore mkt,  which led to upside pressure on INR Appreciation in last few days, a part of which could reverse as actual IPO allocations happen.

(2)    PSU’s overseas bond/loans flows hitting continuously: REC and NABARD raising close to $1.2bn in March.

(3)    RBI’s mild hands off on movement from 73.50-72.50 in less than two week’s period. Sources however say RBI did intervene today as INR tried to flirt below 72.50.

(4)    March Seasonality where exporters convert their bunched up dollar earnings to INR before fiscal year end closing which tends to artificially push INR up against USD.

*  On Net, INR relative up-move looks a bit transient in nature. We would wait up for the IPO effect to get reversed (which partly could be countered by March seasonality in last week of March) and in all likelihood INR will start following suit of its EMFX peers by first week of April.

*  We anyway think policymakers are getting more tolerant on a weaker INR in the medium term and CY21 will see INR being in the middle of the EMFX pack and not an outlier on either side on spot returns.

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