By Dilip Parmar
The global growth slowdown worries spare none. Over the past week, the Fed removed any remaining doubt about its commitment to getting inflation under control. As a result, both bonds and stocks sold off sharply and the debate is now whether the recent risk rally is a trend reversal or a bear market rally and whether the dollar rally continues towards 121. S&P 500 dropped to its lowest level for 2022 and the Dow and global bond market closed in the bear market. Things didn’t look better for risk markets as globally the central banks turned hawkish amid geopolitical and global recession worries. We are seeing coordinated action from global central bankers to stem US Dollar strength. Given the sour risk sentiment, it is difficult to call a peak for the dollar and US yields just yet. The dollar index is expected to bid well in the near term, with strength coming in both against Developed Market and Emerging Market currencies.
Back home, the rupee has been one of the median performers among Asian currencies and remains resilient to a sharp sell-off amid RBI’s intervention. The local unit depreciated 8.8% on a year-to-date basis, but this is far lower than that we saw during the Global Financial crisis of 2008 and the taper tantrum of 2013 thanks to the RBI who regularly intervened and provided stability. The RBI has sold more than $100 billion from the forex kitty. But on the positive front, foreign institutions have bought $7.9 billion worth of equities and around $1 billion in debts, so far this quarter.
Going forward, spot USDINR is expected to trade between 78.70 to 82.90, with a very low possibility of a breakout above this range. We do expect the RBI to continue with significant intervention to stall the rupee depreciation pressures as we have enough reserves and tools for it. We believe one should remain cautious rather than pessimistic as too much pessimism leads to success for contrarian investors. The worries over inflation might not remain for long as high-interest rates and better monsoon signalling inflation peak in the next two quarters. I want to quote famous comic actor Charlie Chaplin, “You’ll never find a rainbow if you’re looking down.”
(Dilip Parmar, Research Analyst, HDFC Securities. Views expressed are the author’s own.)