Currency swings, notably in the second half of 2021, are being driven by various stances of global central banks. A soft August non-farm payroll report and a dovish speech from Fed Chair Jerome Powell at the Jackson Hole have taken some of the sting out of the dollar on the upside. Accordingly, the rupee outperformed most in Asian emerging market basket in August.

However, the Indian currency then started retreating amid the ongoing spillover volatility due to the uncertainty over monetary normalisation by RBI. The latest move by the Indian rate-setter to absorb liquidity through the VRRR auction worth Rs 50,000 crore hinted at the first stage of monetary tightening.

Meanwhile, the dollar got some modest support against the rupee in the wake of strong buying by importers. However, the dollar flow momentum is not yet over. The rupee still remains the favourite carry trade counter in the EM basket, despite any possible outflows that…

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