By Gaurang Somaiya
Rupee continued to trade in a narrow range and volatility remained as market participants remained cautious ahead of the important RBI policy statement and US CPI number that was released at the end of the week. In line with expectations, the RBI held rates unchanged and also maintained its withdrawal of accommodative stance intact. The central bank raised its inflation forecast for FY24 to 5.4% from previous estimates of 5.1%. On the other hand, growth projection was retained at 6.5% for FY24. The RBI asked banks to set aside a larger part of its incremental deposits to tighten liquidity. According to the decision, banks will now have to maintain an incremental CRR of 10% and this did hit the overall market sentiment.
On the domestic front, India inflation and industrial production numbers will be in focus and an uptick in inflation could weigh on the rupee. Also as the currency market on the domestic front remains shut for a couple of sessions next week we expect that volatility could be driven more by global factors. We expect the USDINR(Spot) to trade sideways and quote in the range of Rs 82.60 and Rs 83.20.
Global Currencies
Dollar index traded quite choppy in the range of 101.50 and 102.50 and the reaction was triggered by the US CPI number. Data showed US CPI rose at a slower pace of 3.2% in July as compared to estimates of 3% and it seems that the buzz about more rate hikes would start to settle down in the near future. A lower number does not suggest that the war over inflation is over as the probability chart suggests that the Fed could look to raise rates at its next meeting. On the other hand, jobless claims for the week ended Aug.5th came in at 248,000 as compared to forecast of 230,000 jobs. This week, from the US, retail sales and FOMC meeting minutes will be important to watch and that is likely to trigger volatility for the greenback. Better-than-expected data could extend gains for the dollar.
Euro and pound in the first couple of sessions of the week were weighed down and overall volatility was low for both these currencies ahead of the US CPI number. No major cues were lined up from both these economies and that kept the momentum low for both the crosses. This week, from the UK, employment and inflation will be importantly eyed. Last month, the Bank of England raised rates and showed concerns over high inflation, so this week’s CPI data will build expectations of BoE’s stance on rates going ahead. We expect both Euro and Pound to trade sideways but with a slight negative bias.
The Japanese Yen was the most under pressure following a persistent interest rate gap between the US and Japan. This week, the preliminary GDP number will be released and expectation is that the number could come in marginally lower and could further weigh on the safe haven currency. We expect the USDJPY to trade with a positive bias and quote in the range of 143.50 and 147.20.
(Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services. Views expressed are the author’s own. Please consult your financial advisor before investing.)