Currently, RBI has been protecting 73.50 vehemently and despite the inflows touching an average of $ 800 Mio daily has not relented in leaving this level, writes Anil Kumar Bhansali - Head, Treasury, Finrex Treasury Advisors.

The year 2020 was a watershed year with the coronavirus striking at the beginning of the year and bringing about a lot of pessimism due to lockdown, shutting down of economies world over and millions of deaths. The year has ended with a lot of optimism with most equity markets scaling new highs as a result of unprecedented liquidity in the markets, development of vaccines for the virus and hope that the economies would rise in the year 2021 after a huge fall witnessed during the second and third quarter. The dollar fell with Joe Biden becoming the new President of USA, expectations of more monetary stimulus from most of the developed economies and continuation of accommodative stance in monetary policies of most major economies into 2022 also. The year would also see Britain exiting the Euro Zone by the end of the year with or without a Trade Deal.

RBIs $ BUYING SPREE AND ACCUMULATION OF FEX RESERVES

The USD/INR pair started the year at 71.30 levels and with the pandemic and lockdown reached 75.35 on 31st March 2020 and then made a new high of 76.90 in April - 2020 before RBI ensured that there was no more weakening of the Rupee. In the meanwhile FDI investment in Reliance Jio and Reliance started to flow and despite the lockdown and economy still in a shutdown mode the rupee started on an appreciating journey. The RBI which had bought about $ 30 billion in the previous Financial year and ended the year 31/03/2020 at $ 478 billion of Forex Reserves started on a dollar buying spree and till last reported figures in December -2020 had bought $ 102 billion to ensure that the levels reach a level of $ 580 billion. Currently RBI has been protecting 73.50 vehemently and despite the inflows touching an average of $ 800 mio daily has not relented in leaving this level.

COVID-19 AND ITS EFFECT ON THE ECONOMIES

With the economy under shutdown mode the GDP growth for the first quarter of the country fell by an unprecedented 23.9% while it fell by 7.5% in second quarter bringing India into a technical recession. India has had 4 recessions earlier the last one being in 1980 when the economy fell by 5.2%. However, most of the Rating Agencies have forecast an overall fall of 7-8% for 2020-21 which means that despite lockdown persisting India could show positive growth in the third and fourth quarters. The economy was already slowing before the advent of Covid. The second and third waves of Covid-19 have been hitting Europe and the USA while till now India has come out of it unscathed. The number of deaths and open cases in India are quite low as compared to the rest of the world looking to the population of 135 crores.

U-TURN BY EQUITIES

The Sensex and Nifty50 fell to 26000 and 7500 levels respectively during the pandemic and subsequent lockdown (in March-April-2020) while bank nifty fell to around 20000 levels from a high of 32000. Both indices have since recovered and though Bank Nifty could not make a new high but the Sensex and Nifty have made all time new high of 46890 and 13741 respectively. The PE of Equities has risen to 37 which is overvalued as average PE of Sensex has been around 18. Whenever the PE has risen to highs a correction has come like in 2000, 2007 etc. The liquidity has been fuelling the rally and there has been no correction now for almost two months.

GOVERNMENT AND RBI BRING ABOUT REFORMS

Despite the fiscal strains on its budget for the year 2020 the Government gave Foodgrains and cash to the poorest of poor, brought about schemes to fund the business in particular the MSME, ensured reduction in our imports bill by bringing about the Atmanirbhar Bharat scheme and devised ways to increase our exports from about $ 300 billion to about $ 1000 billion by 2025. The RBI on its part cut rates, ensured more than enough liquidity in the markets despite a stubborn inflation and kept buying dollars to ensure that exporters get better levels for selling their products abroad despite big inflows coming into the country due to FDI/FPI/NRI/Borrowings. The economy also started responding with the second quarter GDP fall at just 7.5% against a projected level of 10%. Though the economy is not back to the full-throttle it is expected that after the vaccination drive we should see growth of about 8.5% in 2021-22. The Government has also made plans to vaccinate at least 30 crore people in the initial drive. The RBI on its part might not have cut the rates in the past 6 months but has been giving doses of reforms in every one of the policies for the markets to ensure that there is no dearth of liquidity and the growth gets the necessary boost to take India to the $ 5 Trillion economy by 2025.

A TAKE ON THE RUPEE

Though Rupee initially fell to 76.90 levels but once the FDI flows in Reliance started hitting the market and RBI relented its buying of $ at 74.50 we saw the Rupee making a headway towards 72.80 where RBI has halted its relentless march and has kept it in a range of 73-75 in the past two months. If not for the RBI buying we could have seen 69-70 levels for the Rupee as imports have also fallen to quite an extent as compared to the last Financial Year. In the next three months, we expect the rupee to swing between ranges of 72.80 to 75.50 levels as RBI may require some weakness in the Rupee to ensure a hefty dividend to the Central Govt. in March-21. However, with the RBI continuing on an accommodative policy for an extended period, flows have now started in the bond market also. This year FPIs have invested a sum of $ 11.200 billion in equity and debt in the current calendar year as against $19.200 billion invested last year. With inflows on one side (due to Global liquidity) and RBI buying of $ on the other side and a fall in $ index below 90 levels (a fall of almost 10% from its peak) we can expect the $ to continue its losses against the rupee till 72.80 but with RBI intervention a level of 75.50 in February-March cannot be ruled out.