Interest, Inflation and Interventions weakened Indian rupee in 2020

India's interest rates, high inflation and Reserve Bank's market interventions weakened the rupee despite a massive inflow of direct and market-linked foreign investments during the pandemic-impacted year.

While major Asian currencies have appreciated against the US dollar such as Chinese yuan by 6.10 per cent, Korean won by 5.50 per cent and Malaysian ringgit by 1 per cent, the Indian rupee depreciated by 3.10 per cent.

It closed 2020 at 73.07 to a greenback.

"In the first half of 2020, there was a massive sell-off in the market due to the lockdown. Later, investors realised that lower crude oil prices and reduced imports was a positive for India," said Sajal Gupta, Head, Forex and Rates, Edelweiss Securities.

"However, that realisation and the investments that followed into the Indian market was too late as the rupee was not able to fully pare its initial losses. Additionally, RBI intervention also played a role in keeping the rupee subdued."

Lately, FIIs inflows have powered a rally in equities and gave an appreciation push to the rupee.

The FIIs have so far this month invested over $22 billion in the equities segment.

"The infusion of liquidity on the local front along with the pick-up in global economic indicators and coronavirus vaccine attracted a slew of FII inflows into the Indian stock market," said Emkay Global Financial Services' Head of Research, Currency, Rahul Gupta.

"Despite these massive flows, the rupee remained on a depreciating bias mainly on RBI intervention to support the export competitiveness and avoid cheap imports."

On the other hand, India's forex reserves continued to rise due to the RBI's interventions.

India's forex reserves swelled up by $123.66 billion to $581.13 billion in the calendar year.

The RBI is known to enter the markets via intermediaries to either sell or buy US dollars to keep the rupee in a stable orbit.

Recently, the Reserve Bank was called out by the US Treasury Department to curtail its market activities.

"Currency rates between two nations move as per prevailing inflation and interest differentials. India has higher inflation compared to the US and hence Indian currency is expected to depreciate compared to the US dollar," HDFC Securities' Deputy Head of Retail Research Devarsh Vakil said.

"Though central bank intervention and fund flows plays a role in determining the direction."