Indian rupee bounces back on signs Covid-19 crisis is abating

The Indian currency rebounded to become Asia’s top-performer from its worst as infection rate in the region's third-largest economy declines

A health worker inoculates a man at a primary health centre in Hyderabad. The Indian rupee has bounced back on sings of a decline in Covid-19 infections in the country. Reuters

The rupee has staged a strong comeback, rebounding to become Asia’s top-performing currency from its worst on signs that India’s Covid-19 crisis may be easing.

India’s currency has climbed 1.7 per cent against the dollar in May to beat all its regional peers as the nation’s daily infections decline rapidly after touching a record high. The rupee also has the benefit of offering Asia’s highest carry returns.

The revival in the rupee’s fortunes reflects India’s efforts to tackle the pandemic, with local lockdowns helping to rein in daily cases, which were the world’s highest in April. Still, the central bank may be wary of a stronger currency given its adverse impact on exports at a time when the economy is emerging from a recession.

“High carry and low volatility are making the rupee stand out” amid hopes that the worst of the virus wave may be over, said Anindya Banerjee, currency strategist at Kotak Securities. The Reserve Bank of India may step in at some stage to limit the currency’s gains, he added.

The rupee tumbled to the lowest in nine months in April as daily coronavirus infections soared above 300,000, triggering the unwinding of up to $50 billion in carry trades. But the situation is still grim with the nation reporting 196,427 infections and 3,511 deaths on Tuesday, suggesting India still has some way to go to rein in the pandemic.

The currency may also get a lift as investors convert dollars from a slew of upcoming initial public offerings into rupees. Online food delivery start-up Zomato’s $1.1bn share offering is among the upcoming IPOs.

Barclays expects the rupee to climb to 72.50 per dollar by next quarter from around 73 now owing to supportive flows, attractive valuations and a less interventionist RBI, according to a note published this week. The rupee rose 0.2 per cent on Tuesday to 72.8575 per dollar.

Besides a more favourable trajectory of reported cases, the rupee has also drawn in speculative funds by offering the highest carry trade returns in the region.

“A lot of the appreciation is due to the revival in carry trades,” said Bhaskar Panda, senior vice president, Treasury Advisory Group at HDFC Bank. Earlier, the unwinding happened as there was a trigger in terms of higher cases. “Now, they are re-positioning.”