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Rupee likely to depreciate amid strong dollar demand, risk aversion in markets; USDINR pair to trade sideways

The Indian rupee Rupee is likely to depreciate against the US Dollar on Wednesday amid strong US dollar, risk aversion in markets, US inflation and Fed rate hike fears.

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USDINR spot price is expected to trade in a range of Rs 78.50 to Rs 80.50 in next couple of sessions

The Indian rupee Rupee is likely to depreciate against the US Dollar on Wednesday amid strong US dollar, risk aversion in markets, US inflation and Fed rate hike fears. USDINR spot price is expected to trade in a range of Rs 78.50 to Rs 80.50 in next couple of sessions. Rupee depreciated by 39 paise to close at 79.63 against the US dollar on Monday, pressured by dollar demand and waning risk appetite among investors in global markets Lower crude oil prices and a rally in domestic equities restricted the losses to some extent, according to forex dealers. At the interbank foreign exchange market, the local unit opened weak at 79.50 per dollar. It oscillated between a high of 79.45 and a low of 79.65 during the session.

The volatility in the Indian currency continued in the first half of July’22 on account of a stronger dollar ahead of the US FED meeting. Strong Payroll and inflation data, Consistent FIIs outflow, and Expectation of a 100bps rate hike further led to the stronger dollar. The strengthening dollar index has created a weakness in all the emerging market currencies. However, in the second half of July, a cool-off was seen in the dollar index after a 75bps rate hike by the US FED along with a slowing pace of increase in the rate hikes with the emergence of economic growth and inflation dynamics. The Indian currency has performed well on account of a higher foreign exchange reserve, robust growth outlook, and macroeconomic stability, according to Axis Securities.

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Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services

“Rupee consolidated in a narrow range on Monday, after the RBI raised rates by another 50bps, third increase in the current cycle to cool stubbornly high inflation that has remained above the central bank’s tolerance band for six straight months. RBI Governor in his policy address said the bank was watchful of rupee stability and its interventions using foreign exchange reserves till now have helped contain volatility in the currency.”

“On the domestic front, inflation number will be released and a higher number could keep the rupee weighed down. Dollar rose yesterday as market participants remain cautious ahead of the important inflation data that will be released today. Inflation figures that could offer clues on how aggressive the Federal Reserve will be in its expected interest rate hike in September. Heightened expectations for aggressive near-term hikes, have pushed short-dated Treasury yields further above long-term peers. We expect the USDINR(Spot) to trade sideways and quote in the range of 79.20 and 79.80.”

Anuj Choudhary – Research Analyst at Sharekhan by BNP Paribas

“Indian rupee on Monday depreciated on positive Dollar and recovery in crude oil prices. However, positive domestic markets and FII inflows cushioned the downside. We expect Rupee to trade on a negative note on strong Dollar and geopolitical tensions as China escalated military drills over Vietnam. Strong jobs data may be positive for US Dollar is it raises expectations of an aggressive rate hike by Federal Reserve. However, foreign fund flows may support Rupee at lower levels. USDINR spot price is expected to trade in a range of Rs 78.50 to Rs 80.50 in next couple of sessions.”

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Amit Pabari, MD, CR Forex Advisors

“The Indian Rupee is expected to open on a flat note at 79.55 and it is likely to trade in a range of 79.30 to 79.75. The closely watched US dollar index is hovering near the 106.20 mark, waiting for today’s US CPI print. On the domestic front, equities are opening marginally lower, in line with other Asian peers and taking cues from Wall Street. The August month rally in the market was supported by the FPIs as they have invested almost Rs. 16,000 crores, although their future investments remain unknown and dependant on the Fed’s tightening call.”

“RBI could now go for buy on dips to make hedges against inflows and we could see reserves bottoming out near $560-70 billion for a while. Thus, the impact of the inflows would be nullified and onto it, higher month-on-month import trades suggest higher demand for the USD. The lower oil prices seem good news for the Indian Rupee, but other headwinds like- the widening trade deficit, Fed’s tightening, and US-China tension over Taiwan may not allow it to remain an outlier. Overall, the pair is expected to find support near 79-79.20 and could be seen again heading towards the psychological 80 mark.”

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