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Outflow of funds, govt finances and crude prices to determine INR performance

The Dollar index was near 104-105 levels on May 12, 2022, and thereafter, it pulled back to 102 levels later in the month. But the index surged thereafter touching 104.28 by June 20, 2022. The movement in the Dollar Index demonstrates the strength of the US unit and the likely trajectory in the coming months.

The very fact that almost every other economy is plagued with inflationary pressures and falling economic growth rates, brings to the fore the safe-haven status of the US Dollar in the face of uncertainties. What has added to this positive sentiment is the emphatic action on interest rates from the Fed which instilled confidence in the markets that the inflation combatting mode will bring to a halt the price rise faster than expected.

The inflation in the UK and other parts of Europe is at a multi-year high. The latest economic data from Europe indicates the growth challenges. Though the ECB has already announced its desire to bring in rate action, nothing concrete has been materialized yet. The worst loss against the US Dollar was witnessed in the Japanese Yen, mainly rattled by low-interest rates, a low rate of growth, and a notso-buoyant local demand. The currency may lose more ground as growth concerns escalate and as demand remains subdued. The Yuan is weaker compared to its position about six months back.

The resurgence of COVID fears, the lockdown in the important provinces, the impact of the domestic conditions on trade, etc. resulted in a weaker currency. The Indian Rupee has been adversely affected mainly by the FII pulling out funds from the equity market, rising crude prices, and the deteriorating trade balance and dollar strengthening. The Indian government’s finances may also be a matter of concern for overseas investors given the rising expenditure which may lead to dependence on the markets for additional resources.

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