By Dilip Parmar
The rupee could start the day on a positive note amid foreign fund inflows, risk-on sentiments and lower crude oil prices. Risk sentiment was bolstered by developments in Europe, where Ukraine was making progress in its counteroffensive against Russia. While investors now appear comfortable with the prospect of a 75-basis point interest rate rise by the Federal Reserve.
India’s retail inflation rose more than estimated in August, driven by high food and fuel costs, posing a fresh challenge to the central bank’s efforts to cool prices. Consumer prices rose 7% last month from a year earlier, faster than an estimate of 6.90% and compared with a 6.71% reading in July. The reading snapped a three-month downward trend and added pressure on the Reserve Bank of India for a rate hike. The central bank has raised the benchmark policy rate by 140 basis points so far and is scheduled to hold its next rate review on Sept. 30. From a policy perspective, we expect the RBI to raise the policy rates by 50 bps in its upcoming policy as inflation risks continue to linger. Moreover, with aggressive tightening by global central banks, the RBI might be pushed to continue front-loading its rate hikes as a defense for the rupee.
Foreign institutions have bought $8.08 billion worth of equities in the last three months while the rupee is down by 0.69% following broad-based strength in the dollar index. Spot USDINR has been finding resistance around 80 following the central bank’s aggressive intervention while pullback in the dollar index and foreign fund inflows pushing the pair lower. Looking at the recent high-frequency data and global uncertainties, the pair is expected to trade within the range of 78.70 to 80.10.
The dollar’s pullback in recent days is prompting speculation about whether the currency’s march higher is coming to an end. With the Federal Reserve set to continue its tightening cycle at next week’s policy meeting, Wall Street is expressing growing optimism that the current inflationary dust-up will soon settle down. However, it is still in the advanced stage to say so as economic data and fear of recession will support the dollar bulls.
(Dilip Parmar, Research Analyst, HDFC Securities, Views expressed are the author’s own.)