By Dilip Parmar
In line with weaker Asian currencies, the rupee also surrendered the gains following the central bank’s dollar buying, foreign fund outflows and risk-averse moods. However, the losses were limited by weaker crude oil prices and corporate dollar inflows in the holiday truncated week. Spot USDINR gained eight paise to 82.05. Stocks sank by 1% on the Nifty to wrap up a brutal minus 4.4% showing for the year.
Spot USDINR is stuck between 81 to 83 since October 2022. While the direction for the pair remained up on a longer-term basis, the short-term trend remains sideways. The derivative data suggests upward price actions in the pair with immediate resistance placed at 82.50, where maximum open interest has been seen.
India’s forex reserves gained by $1.5b to $562.4%, the first weekly addition after four weeks of fall, as dollar inflows were absorbed by the central bank to curb the volatility and match the demand-supply matrix. Haven demand has been seen in the Japanese Yen and Swiss franc after US’s second-largest bank collapses.
Recent retail inflation data was discouraging for the rupee as it has been above the central bank’s mandate of the 2% to 6% band for the second month in a row. The CPI reading of 6.44%, risks tipping the balance towards more aggressive rate hikes. In the week gone, the dollar index settled with minor gains while the Japanese Yen recovered after the BOJ removed some uncertainty by leaving its policy unchanged.
A hawkish shot from Fed Chair Powell hurt stock markets last week and declines accelerated as Silicon Valley Bank collapsed. That has provoked some radical reassessments of the likely path for rates and asset valuations, from “we’re definitely getting 50 bps” to “there’s no way we’re getting 50 bps”. Fed funds futures are pricing at a peak rate of below 5.3%. That was ~5.44% last Friday but climbed above 5.6% after Powell spoke on Tuesday. Treasuries had a winning week.
What to Watch: Apart from inflation and IIP data, the focus will be on Thursday’s ECB monetary policy meeting, where a half-point hike is pretty much sure, so the comments will be the thing to watch. How explicit Lagarde will be about what to expect in May? UK Exchequer Chancellor Jeremy Hunt will present his annual budget to Parliament Wednesday.
(Dilip Parmar, Research Analyst, HDFC