FX DEVELOPMENTS IN 2020-21 and Future outlook


We hope to have reached the end of the tunnel with a big sigh of relief and prayers for the well-being of the entire humanity. It will be an understatement to describe 2020-21 fiscal year as an eventful year. The year started on a gloomy note with lock downs and no clear visibility on the path ahead. But the country and the world are bouncing back from a traumatic period with resilience and confidence. The year has finally ended on an optimistic note with all round signs of deep economic recovery.

Global health crisis of a tragic magnitude like what we witnessed was fought by Govt’s, central banks and health industry with unimaginable liquidity power and innovation. Vaccine development, progress in vaccinations and the know how to tackle new waves of infection have stirred new confidence to maintain the economic momentum of last quarter.

Indian economy shrunk almost 30% in Q 1, but recovered to positive growth in Q3. Govt, RBI and multi-lateral agencies are projecting 9.5 to 12.5% GDP growth in 2021-22 fiscal.Govt of India unveiled massive structural reforms during this fiscal and presented a stellar budget with focus on privatisation, manufacturing and infrastructure. PLI schemes for many manufacturing sectors, credit guarantee schemes, SME reclassification, Asset reconstruction bank for PSU bank NPA’S, monetisation of PSU assets are some of the path breaking measures. Targeted fiscal support to the BPL families, DBT to Kisans are some of the welfare measures announced by the Govt. Loan moratorium and extension of benefits in housing sector were targeted for Middle income group. Govt also passed Farm laws to lift farming sector for greater investment by private sector. RBI unleashed liquidity, extended benefits to NBFC sector and cut rates deeply not -withstanding the upward trajectory of inflation.

FII’S poured money into Equity markets.In 2020-21 finanacial Year, FII’S have nett bought Rs 274203 Cr of Equities and have sold Rs  42820 Cr in debt. In FY 19-20, FII’s sold Rs 10200 Cr of Equities and 47393 cr of debt.


Indian FX reserves is now at USD 582 bn. This is USD 100 bn addition to March 2020. India has become the fourth largest FX reserves holding country in the world.

FDI investment in India grew 40% to USD 51.47 bn in Apr-Dec 2020 period.

Indian Exports in Apr-Mar period stood at USD 290 bn, down 7.4% y/y. Imports slowed 18% to USD 389 bn. Trade deficit till March stood at USD 99 bn.In March alone, Exports jumped 58% to USD 34 bn, highest export data. Imports also jumped to USD 48 bn. March trade deficit stands at USD 14 bn.The current account balance recorded a deficit of $1.7 billion (0.2 per cent of gross domestic product) in the third quarter of 2020-21 after a surplus of $15.1 billion (2.4 per cent of GDP) in the second quarter of 2020-21 and $19.0 billion (3.7 per cent of GDP) in the first quarter of 2020-21. Indian Current account may end up with surplus in 2020-21 at 2% of GDP.

Inflation has increased constantly due to supply chain issues and bottlenecks due to localised lock downs. Increase in Crude price has also contributed to inflation. Global metal prices rallied steeply due to economic optimism. Indian CPI maintained an average growth of 6.23% y/y. Though Feb inflation declined to 5.03%, it is still uncomfortably high.

GST collections have steadily climbed and crossed 1.23 lac Cr in March, highest since GST introduction. Auto sales have climbed past pre pandemic levels. Electricity generation, fuel sales and freight collections are indicating contiuned momentum as we enter 2021-22 fiscal year. Service industries like Hotels, transport and tourism are yet to recover fully.


USD/INR 73.11 75.66 -3.3
EUR/INR 85.78 83.08 3.3
GBP/INR 100.76 93.54 7.7
JPY/INR 66.03 70.07 -5.7
USD INDEX 93.23 99.05 -5.87
NIFTY 14690 8597 71%
GOLD 1707 1571 8.65%
G-SEC 10 YEAR 6.18 7.34 -16%
US 10 YEAR 1.74 2.40 -19%
WT I CRUDE 59.16 20.48 195%

USDINR rallied to 77 in Apr 2020. However, the pair reversed in April and declined to touch 72.30 in March 2021. RBI bought USD at various levels to stem gains. FDI inflows, Current account surplus, IPO flows contributed to Rupee gains. USD’s decline against majors also kept up positive sentiment for Rupee. USDINR fwdpremia hit a low of 3.5% for 1 year. However, premia has gained to trade now at around 5% p.a. for 1 year. EUR and GBP also gained against Rupee. EURINR climbed past 90. It has now pulled back below 86. Nifty reversed its losses and climbed past pre pandemic levels within the calendar year. Crude has also rallied on hopes of Global economic recovery.

Global developments: It was dominated by Covid, US elections, Brexit and Vaccination. Fed led Global central banks in slashing rates. USD interest rates were brought down close to zero. US Fed unleashed trillions in liquidity and was supported by US fiscal packages which included direct income transfer to households. ECB also unveiled and expanded asset purchases under Pandemic relief package. BOE and Bank of Japan also contributed to Global liquidity. The unprecedented response to pandemic has helped to mitigate deeper economic crisis. Vaccine development and vaccination progress has lifted confidence. Global manufacturing has maintained a steady uptrend as evidenced by PMI(mfrg) data. However, services sector is still in contraction mode in EU due to lock down measures.

Global economic outlook has been upgraded.OECD revised Global economic growth by 1.4% to 5.6% for 2021. Indian GDP growth was revised up by 4.7% to 12.6%. US is set to grow by 6.2%, EU by 3.9%.

Economic growth has also resulted in a tearing metal price rally. Crude also trebled from under USD 20 to above USD 60 within the calendar year. Global yields have firmed up due to fear of inflation. US 10 Year yield has jumped to 1.72%.

In FX markets, USD suffered till Dec. EURO climbed to 1.2350 against USD, though it is now down to 1.17 levels. Unwinding of Euro carry trades resulted in steep USD decline. However with US economic growth outpacing Euro growth, USD has climbed against Euro in the last few months. UK pulled out of EU on Dec end. With uncertainty gone, Pound rallied to climb past 1.45 against USD. Yen has declined to 110 on rising yields in closing months of the fiscal.

Outlook: With vaccination progress, Global and Indian economies are likely to rebound sharply. Inflation will remain a matter of concern, but will be tolerated by central banks. Fed Chairman has assured of low rates till end of 2022. RBI is mandated to maintain inflation in the 2 to 4% range. However, RBI will consider the present inflation rate as transient and may maintain steady rates in this fiscal. Govt fiscal deficit is likely to breach 6.5% target set by Govt. Increased borrowing should keep yields supported. Indian 10 Year G-SEC yield is likely to trade in the 6-6.25% range. Indian Equity indices remain stretched on valuation. However, with robust corporate earnings and Global liquidity, scope for significant correction is limited.

USDINR outlook: Considering the recent USD strength against majors, Rupee could face pressure. Current account could flip into deficit again as economies recover. FDI and FII inflows will remain strong. FII inflows could be lower than this fiscal. On the fundamentals side, Rupee can still gain. However, RBI will be mindful of gains hurting Indian exports. Hence, RBI will defend 72.30 levels. Upside break of 73.80 could trigger further decline in Rupee, technically. Imports should be hedged on decline to 72.50 and be covered should there be a break of 73.80. Exporters can wait for further hedging if 73.80 is breached.

EURINR is set to decline further, possibly to 83.50. Expect 87.50-88 to resist. Expect 82-88 trading range for this year.GBPINR could trade in the 96-103 or 93-103 range in 2021-22 fiscal.


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