Indian Rupee spot has been in the range of 82.4 – 83 levels for almost a month and is not far from an all-time high of 83.29 touched in October 2022. Crude oil prices falling by more than 8% in the previous week has provided a helping hand for the net importer of oil. However, hawkish FOMC meeting minutes, higher yields in US and a stronger dollar along with robust FII selling prompted buy on dips in the USDINR pair throughout the week. Both the benchmark indices Nifty and Sensex fell more than 1%, amid broad risk off sentiments ahead of US jobs data.
FPI investments witnessed a net outflow of Rs.7,908 crores from domestic securities in the first week of January. Sharp fall in domestic exports relative to imports and prospects of widening trade deficit continue to weigh down on Rupee.
On the economic data front, India’s Manufacturing PMI climbed to 57.8 in December 2022 from 55.7 in the prior month, pointing to the highest reading since October 2020 and marking the 18th straight month of expansion.
Dollar index started the week on a positive note, underpinned by hawkish FOMC meeting minutes. The December minutes showed that several participants cautioned against prematurely loosening monetary policy, in view of the persistent and unacceptably high level of inflation. No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. The greenback rose above 105 levels, to a one month high, as the ADP employment change and weekly Jobless claims pointed to a tight Labour market. However, all the early gains were pared on Friday amid profit booking, even though Labour data pointed to a tight market.
Outlook for the week: US CPI in focus
US Labour data released on Friday showed that the economy added 223K jobs in December 2022 and the unemployment rate edged lower to 3.5%, pointing to a tight jobs market. However, slower than expected wage growth and a contraction in US Services PMI led to sharp fall in dollar index. US ISM Services PMI fell to 49.6 in December 2022.
Few economic data are only scheduled for the coming week. US CPI data on Thursday is going to be in focus. Bloomberg estimates US CPI to decline to 6.5% in December compared to 7.1% in November, while core CPI is also forecasted to edge lower towards 5.7%. Expectations of a sharp decline in CPI also led to profit booking in the greenback after rising to a one month high last week. US 2 year and 10 year treasury yields shed 20 and 16 bps respectively on Friday.
Though Fed officials and recent FOMC projections are pointing to zero rate cuts in 2023, money markets are pricing in two 25 bps rate cuts by December 2023 amid the backdrop of plunging inflation and slowing economy. Jobs market is poised to cool down significantly in coming months, as monetary policy effects often comes with a lag of 6-12 months.
Rupee spot is expected to appreciate in the coming week, gaining strength from sharp fall in the greenback and US treasury yields post Friday’s close. Risk on sentiments might prevail in the market. Dollar index might fall below 103 levels if US CPI comes lower. Powell’s speech is due on Tuesday and investors might likely shrug-off any hawkish comments.