Rupee was range-bound last week, could see low volatility going ahead; traders eye May inflation for cues

By Gaurang Somaiya

Rupee traded in a narrow range for the week and market participants remained cautious ahead of the important RBI policy statement that was released at the end of the week. In line with expectations, the RBI held rates unchanged for the second successive meeting and remained focused on withdrawal of accommodation stance. The RBI also retained FY24 GDP growth forecast at 6.5%, while expecting FY24 CPI inflation to be at 5.1%, a tad lower than the earlier estimate of 5.2%. Amid a volatile global economic scenario and lingering risks to domestic inflation, it was likely that the RBI would follow a wait-and-watch strategy. The MPC is maintaining tight monetary conditions by continuing its stance of withdrawal of accommodation.

Volatility for the dollar against its major crosses also remained low as no major cues were lined up from the US. In case of the major crosses, be it Euro, Pound or the Japanese Yen volatility remained low and it was the intraday move’s in dollar Index that triggered momentum for the pairs. Market expectations oscillate between a rate hike or a pause at the June meeting; but we expect that this time the Fed could consider taking pause. Mid-week the dollar edged higher also as investors awaited U.S. inflation data for May that is scheduled to release next week.

On the domestic front, inflation numbers will be important to watch; expectation is that inflation could recede further and that could trigger volatility for the currency. But importantly, it will be the FED, ECB and Bank of Japan policy statements that will be guiding the market. The Federal Reserve is expected to take a pause on raising rates as it will look to evaluate the impact of recent rate hikes.

On the other hand, the ECB is expected to raise rates by another 25bps and maintain a hawkish stance. This week, volatility for the Indian Rupee could remain low in the first half of week, but in the latter half volatility could again be on the rise following the release of a major central bank policy statement. Inflation numbers from the US and India too will be important to watch. We expect the USDINR (Spot) to trade sideways and quote in the range of 82.20 and 83.05.

(Gaurang Somaiya, FX and Bullion Analyst, Motilal Oswal Financial Services. Views expressed are author’s own. Please consult your financial advisor before investing.)