Indian rupee falls nearly 3% YTD in 2020; check how it will fare against US dollar in 2021

Indian rupee remained one of the worst performing regional currencies in 2020, despite record inflows from foreign institutional investors (FII) and foreign portfolio investors (FPI) into Indian equities. Earlier this year in April, the Indian rupee hit a record low of 76.92 against the dollar. On a year-to-date (YTD) basis, the Indian rupee has depreciated 2.83 per cent in the year 2020, from 71.28 to 73.30 levels. On the contrary, it has appreciated 3.14 per cent, from 75.68 to 73.30 levels, so far this fiscal. According to an analyst, the fall in Indian rupee is understandable given the economic uncertainties and fall in growth rate that led to global investors rush to the greenback which is considered as a safe haven. “As we wrap up for a bumpy 2020 where rupee remained one of the worst-performing regional currencies, 2021 brings no surprises,” said Amit Pabari, managing director, CR Forex Advisors.

The depreciation in the Indian rupee has a positive impact on Indian exporters and Information Technology (IT) companies. Pabari added that the unprecedented fiscal and monetary support in the form of stimulus and lower interest rates turned a boon for 2020 to help the economy come back on a recovery road. According to him, the strains could be felt in 2021 with fiscal deficit rising to nearly 8 per cent of GDP from the budgeted 3.5 per cent, the gap shall be filled by debt and borrowings adding pressure on the USD-INR pair. Since June 2019, India’s exports have been negative for 15 of the past 17 months. “Rising inflationary pressure and RBI’s continued dollar buying intervention in heavy quantum, shall further push Indian rupee towards depreciation.

How will Indian rupee fare against US dollar in 2021?

So far in the year 2020, the Indian rupee suffered great volatility and seesawed between 76.90 and 70.75 levels against the US dollar. Rahul Gupta, Head of Research-Currency, Emkay Global Financial Services told Financial Express Online that what happens to Indian rupee largely depends on how the major economies control the virus in 2021. Until the global economy is capable of recovering at a rapid pace once COVID-19 is defeated, the upside risk to the USD-INR spot will remain intact.

Rahul Gupta also said that there is a possibility of a revival in the US-China trade war as Joe Biden pledged to continue enforcing actions against China. “So in 2021, overall the USD-INR trading range will be 71.50-76.30. As long as the USDINR spot is trading above 72.75-73.00, the trend will be bullish with 74.50 being the key resistance. A break of 74.50 will open doors for 75.25 and then 76.30. While a break of 72.75 will push the spot price to 71.50-72.00 zone,” Gupta added.

Amit Pabari said that the broad-based dollar weakness due to dampening dollar demand in the international market along with persistent foreign inflows shall remain major support for the rupee. With that, rupee in the near term seems biased towards appreciation and the medium and long term trend indicate weakness. “To put in a nutshell, the strength in the rupee seems to be limited to 72.00-72.50 whereas the weakness shall be capped near 75.00-75.50 levels, keeping the broader range for the rupee in 2021 bounded between 72.00-75.50 levels for 2021,” he said.