Going forward rupee's trajectory would be heavily dependent on the flows in the Indian market coupled with vaccine hopes for the COVID-19 virus.
Since the start of 2020 till date (August 13, 2020), USDINR has depreciated by 4.3 percent. Meanwhile, the dollar index has declined by 3.36 percent in the same time frame. The depreciation of the Indian rupee was on account of rising number of coronavirus cases within the country which has affected the rate of recovery for the domestic economy.
India's trajectory of COVID-19 cases to affect demand recovery
India's daily count of COVID-19 cases have been on the rise with an average of 60,000 cases being reported daily in the country. For the period between August 1 and 8, India reported 3,99,263 new cases of coronavirus whereas the US recorded 3,84,099 cases. This was the first time when India eclipsed the US trajectory of weekly cases which has been the hardest hit nation from the virus. This unprecedented rise in cases has affected the demand prospects in India.
According to the IMF India's 2020 GDP is expected to contract by 4.5 percent on account of the pandemic that stalled all activities within the country. In terms of GDP contraction, this would be historic lows for India in 2020.
Meanwhile, RBI has also projected a contraction in the Indian economy for the first half of FY21 but refrained from giving any quantifiable guidance for the same.
Central Banks to play a key role in this recovery
US Federal Reserve's balance sheet has ballooned to nearly $7 trillion in August 2020 from $4 trillion at the start of the pandemic in March 2020. The US Fed has been using all the weapons in its arsenal to support the ailing economy from buying mortgage-backed securities to private credit. The central bank recently approved a scheme for providing loans to small non-profit organisations as well.
In its latest policy meeting, the US Fed decided to hold interest rates at 0-0.25 percent till the end of 2022 to provide the necessary support for the US economy to recover in the coming future.
RBI too in line with major central banks across the globe has kept its policy accommodative in order to support the Indian economy. Repo rate currently stands at 4 percent.
Vaccine hopes to keep Rupee afloat
The pandemic has hit almost every nation across the globe but the two most brutally hit nations have been India and US. Cases in India has been on a rise on a daily basis which is a major cause of concern for a developing nation like India.
India's growth rate is likely to be in negative territory in 2020 but any hopes of mass-scale production of the virus vaccine would help in major recovery for the domestic economy.
Meanwhile, FII flows into the Indian equity market turned positive since the start of May 2020 on account of ample liquidity induced by major central markets across the globe. There has been an inflow of Rs 66,156 crore in the Indian equity market from May 2020 to August 2020.
Contradictorily, since the start of this pandemic, US treasury yields have fallen from 1.4 percent in February 2020 to 0.66 percent in August 2020 on account of investors hoarding towards safe-haven assets during this pandemic.
Going forward, rupee's trajectory would be heavily dependent on the flows in the Indian market coupled with vaccine hopes for the COVID-19 virus.
Hence, USDINR (CMP: 74.84) is likely to move in the range from 74 at the lower end of the spectrum and 76 at the higher end of the spectrum in August 2020.
The author is Research Analyst at Angel Broking.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.