The net FPI fund flows have been positive over the past week
BL Research Bureau
Riding on a weak dollar (USD), the rupee (INR) appreciated in the past week and on Wednesday, it closed at 73.42. Thus, the year-to-date loss of INR against USD now stands at about half a percent. While foreign inflows worked out for the local currency, persisting weakness in dollar also helped rupee fare better against the greenback. Last session, inflation data were released in India and the US and this can have an impact on the exchange rate of USDINR. Let us take a look at the latest numbers and its impact on the exchange rate.
India Inflation softens
The Consumer Price Index (CPI) in India stood at 4.29 per cent in April according to government date. It softened from 5.52 per cent in March. The decrease in inflation is because of a notable drop in Consumer Food Price Index (CFPI) which has declined to 2.02 per cent in April from 4.87 per cent in March. This is because of a significant drop in vegetable prices which came down by 14.18 per cent in April. Lower inflation is better for the currency and the latest inflation number is within the targeted levels of the Reserve Bank of India (RBI).
The US too came up with its inflation data for April – the CPI inflation rose to 0.8 per cent from 0.6 per cent recorded in March. Unlike India, the Federal Reserves will see the increase in inflation positive as they attempt to increase it by encouraging spending to support the economic recovery. Although it can be positive from the perspective of US, the inflation rate differential between India and the US dropped to 3.49 per cent in April from 4.92 per cent and this can lead to adjustment in the exchange rate in favour of the Indian currency.
The foreign portfolio investors (FPI) seemed to have pumped in money into the domestic market as for the month of May, the net outflows across all segments have reduced to ₹4,163 crore compared to ₹5,688 crore a week back according to National Securities Depository Limited (NSDL) data. That means, the net FPI fund flows have been positive over the past week. The outflow in equities continued (net outflow of ₹432 crore) whereas debt saw considerable inflows (net inflow of ₹1,270 crore). Irrespective of which segment sees inflows or outflows, rupee can benefit if the overall foreign fund flow is positive.
Factors like the decreasing inflation differential and the foreign inflows are supportive for the rupee. Because of the increase in the inflation, which is seen positive for the US economy, there can be a temporary rally in the dollar weighing on the domestic unit. This may drag INR to 73.60. However, it is less likely to sustain and the rupee might regain momentum and move towards 73.00 in the short term.