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Rupee to depreciate on elevated crude oil prices, hawkish Fed; USDINR pair to trade in this range

The rupee is expected to depreciate today due to higher crude oil prices and concerns over rising geopolitical tensions between the US and Russia.

Rupee vs US dollar
Rupee will be hit by this potent cocktail of rates, oil, risk-off, and US Dollar Index

The rupee on Tuesday depreciated by 16 paise against the US dollar on account of month-end dollar demand from oil importers and a stronger American currency in overseas markets. Pessimistic outlook and investors’ weak appetite for riskier assets also weighed on the local unit. At the interbank foreign exchange market, the rupee opened at 74.60 against the greenback and witnessed an intra-day high of 74.57 and a low of 74.80 during the session before settling at 74.76, down by 16 paise over its previous close of 74.60. Rupee is expected to slip further on strong dollar, elevated crude oil prices, Fed interest rate hikes and risk-off, according to analysts.

“On Thursday, the US dollar rose to a five-week high as Federal Reserve Chair Jerome Powell signaled that interest rate hikes in the US will begin in March. The Fed kept its policy steady overnight, but Powell hinted at a long battle to keep inflation under control. Following the Fed’s decision and Powell’s statements, the dollar jumped 0.7% against the yen, its biggest daily gain in more than two months, as the potential of future rate hikes frightened stock markets and drove bond yields higher,” said Kshitij Purohit, Lead Commodity & Currency at CapitalVia Global Research.

Rupee likely to depreciate further: ICICI Direct

“Rupee future maturing on January 27 depreciated by 0.23% on the back of stronger dollar index and higher FII outflows. However, further downsides were prevented as risk appetite in the domestic markets increased. The rupee is expected to depreciate today due to higher crude oil prices and concerns over rising geopolitical tensions between the US and Russia. Further, expectations of better-than-expected GDP data from the US and hawkish statement from the US Federal Reserve Chair Powell may continue to put pressure on the rupee. US$INR (February) is expected to rise towards 75.35.”

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

“Rupee consolidated in a narrow range but traded with a weaker bias against the dollar ahead of the important Fed policy statement that was released last evening. The Fed Chairman in its policy statement suggested that the Fed would push forward with interest rate hikes. In its latest policy update, the Fed signaled it is likely to raise U.S. interest rates in March and reaffirmed plans to end its bond purchases that month before launching a significant reduction in its asset holdings. Powell warned that inflation remains above the Fed’s long-run goal and supply chain issues may be more persistent than previously thought. Subsequent interest rate increases and an eventual reduction in the Fed’s asset holdings would follow as needed while officials monitor how quickly inflation falls from current multi-decade highs back to the central bank’s 2% target.”

“Dollar rose sharply against its major crosses after the announcement whereas equities witnessed selling pressure at higher levels. Yields on longer-dated Treasury securities, sensitive to the Fed’s balance sheet policy, rose as Powell signaled that a decision would be made soon on when to start shrinking the central bank’s more than $8 trillion portfolio of U.S. government bonds and mortgage-backed securities. Today, focus will be on the advance GDP number from the US and a better-than-expected number could extend gains for the dollar. We expect the USDINR(Spot) pair to trade with a positive bias and quote in the range of 74.40 and 75.20.”

Anindya Banerjee, Head of Research for FX and Interest Rates, Kotak Securities

“The cocktail of negatives for the Indian Rupee can drive the pair towards 76 levels over the near term. On one hand, is the US Fed which confirmed the very hawkish expectations of the market. Once the taper completes in March, rate hikes may begin and maybe between 4/5 hikes in 2022, as inflation has been far higher and stickier than Fed had expected. Fed has hinted at balance sheet run-off instead of outright bond selling to reduce the size of its holdings in MBS and Treasuries. All in all, a very hawkish policy tilt. This has allowed the US yields to jump and the yield curve to flatten. US Dollar has strengthened and equity markets are under pressure. But there is little impact on oil prices. With oil on the boil, at a fresh 7-year high, Rupee will be hit by this potent cocktail of rates, oil, risk-off, and US Dollar Index. Buying on dips is advisable as long as spot USDINR holds above 74.70 on spot.”

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