Rupee likely to depreciate to 83 in near term; all eyes on RBI Monetary Policy

Rupee likely to depreciate in near-term. Technical set-up remains for USDINR is bullish as long as it trades above 80.90 while on the higher side, one should eye on 82.70 and 83.30.

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RBI may defend the 83.00 mark and the rupee could face some resistance therein.

By Dilip Parmar

Indian rupee started the year on the front foot by registering a gain in January month, the strongest January month after 2016. The lower commodity prices, the expectation of interest rate pick out and the rebound in risk assets followed by foreign fund inflows. Spot USDINR tumbled 0.98% or 81 paise to 81.93. Technical set-up remains bullish as long as it trades above 80.90 while on the higher side, one should eye on 82.70 and 83.30.

Among the many mystifying things that happened in the past few weeks, the focus will now be on the RBI monetary policy decision which will likely deliver another rate hike on February 8 but signal that the cycle ends are near. The consensus estimate is also a 25 bps hike. The RBI’s commitment to withdrawing stimulus and its focus on bringing down elevated core inflation support a hike.

Economists expect the RBI to slash its retail inflation forecasts as inflation has surprised to the downside since it last met. The free food program introduced by the government in January puts the central bank’s projections further out of synchronise with likely developments. On the growth front, the central bank is likely to keep its projections but highlight that risks are now tilted to the upside.

Another important data will be Industrial production for December month. Growth in India’s industrial production likely accelerated in December. Improved consumer and business sentiment, lower commodity prices and increased government spending were factors likely driving the gains. The reading is likely to come at 8.6% Y/Y in December, up from 7.1% in November.

The US currency has been sliding since early November when the last of the Federal Reserve’s three-quarter point hikes was deemed to signal that peak tightening was imminent. The dollar weakened against the major currencies in the month gone as markets pricing in dovish fed going ahead. However, it is too early to say as there will be geopolitical uncertainty and the decision of the FOMC will be data-dependent. The dollar index marked the fifth month of decline in January and registered a nearly 12% drawdown. We expect some relief rallies in February before marching towards 100 as the overall trend is still bearish.

Recent Fed meetings saw a slower pace of rate hikes but signalled more to come. Markets turned a dovish ear to that hawkish signal- with yields falling and stocks rising. The January jobs report showed the labour market was still hot underscoring risks to market expectations of a Fed pivot.

(Dilip Parmar, Research Analyst, HDFC securities. The views expressed are the author’s own. Please consult your financial advisor before investing)

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First published on: 07-02-2023 at 08:50 IST