Indian bonds’ inclusion in JP Morgan’s EM index to be game changer for Rupee; US Fed meeting major trigger | The Financial Express

Indian bonds’ inclusion in JP Morgan’s EM index to be game changer for Rupee; US Fed meeting major trigger

Unless, US Fed takes a dovish pivot, sharp appreciation in rupee is unlikely, said Jigar Trivedi, Senior Analyst – Currency & Commodity, Reliance Securities in an interview.

Indian bonds’ inclusion in JP Morgan’s EM index to be game changer for Rupee; US Fed meeting major trigger
Any news on the inclusion of Indian bonds in JP Morgan's emerging market index will be a short-term relief for Rupee

The rupee appreciated 16 paise to 79.65 against the US dollar in early trade, in line with a positive trend in domestic equities. At the interbank foreign exchange, the domestic unit opened at 79.70 against the dollar. Since the beginning of this year, the Reserve Bank of India (RBI) has been defending the local currency relentlessly from the onslaught of the US dollar outflows. Unless, US Fed takes a dovish pivot, sharp appreciation in rupee is unlikely, said Jigar Trivedi, Senior Analyst – Currency & Commodity, Reliance Securities in an interview with Harshita Tyagi of FinancialExpress.com. Meanwhile, any news on the inclusion of Indian bonds in JP Morgan’s emerging market index will be a short-term relief for Rupee, he added. Here are the edited excerpts from the interview.

Rupee has been hovering near 80 mark for the past couple of weeks, will it move below 80 in the near term?

Rupee weakness can be mainly attributed to macro factors such as a strong dollar, rising real rates in the US, and an aggressive Fed ready to go to any extent to quell the surging inflation. Unless we see a dovish pivot from the Fed, sharp appreciation in Rupee is unlikely.

Also Read: India’s robust growth momentum may create macro stability challenges for economy

What will be the key triggers for Rupee movement going forward?

The FOMC meeting on 21st September is going to be crucial. For now, the focus will be on Fed terminal rates from September projections. Having said that, any announcement of Indian bond inclusion in global indices might prop up Rupee.  

Inflation is high, triggering expectations of aggressive rare hikes in upcoming RBI MPC. How will repo rate hike impact rupee?

In August domestic inflation rose to 7%, for the first time in 4 months mainly due to food and shelter inflation. However, India’s GDP expanded by 13.5% in Q2, particularly due to the lower base effect, but was below expectations. Amid slowing growth, we expect RBI to hike by 35 – 50 bps in the September meeting. Higher repo rates will help the currency as it will improve the inflows into high-yielding bonds. 

What can be expected from the central bank in the coming days to stabilise rupee?

RBI is likely to stick to forex intervention via spot markets to stabilize the Rupee. Meanwhile, any news on the inclusion of Indian bonds in JP Morgan’s emerging market index will be a short-term relief for Rupee. 

How will inclusion of Indian bonds in global index, Trade settlement with Russia in rupees impact local currency?

The inclusion of Indian bonds into JP Morgan’s emerging market index is a game changer for Rupee and will help to reduce the BoP deficits. The move is expected to bring about $30 billion in FY24 and the odds of inclusion have risen after Russia’s exclusion from the same post the Ukraine invasion. International trade in Indian Rupee is far from reality but is a good initiative from the central bank. India’s trade with Russia accounts for almost $2 billion, which is comparatively less compared to global trade. 

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What is the ideal investor strategy for forex traders for the next 6 months?

The best strategy going forward might be Rupee bid. Pain could be seen for the emerging market currencies until the dollar peak, which is not expected until 2022 end, as Fed remains committed to bringing down inflation to the 2% target, no matter what. Market participants are closely watching for the September SEP, which might give more cues on Fed’s futures rate hikes. We expect the Fed funds rate to be 4% by year-end and 4.5% by March 2023. Terminal rates might even rise if inflation fails to cool down.

(The recommendation in this story are by the respective analysts. FinancialExpress.com does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)

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