Indian rupee spot appreciated by 0.16 paisa and closed at 82.47 vs previous week’s close of 82.30

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Rupee traded in a narrow range for the week and market participants remained cautious ahead of the important RBI policy statement that was released at the end of the week. In line with expectations, the RBI held rates unchanged for the second successive meeting and remained focused on the withdrawal of the accommodation stance. The RBI also retained the FY24 GDP growth forecast at 6.5% while expecting FY24 CPI inflation to be at 5.1%, a tad lower than the earlier estimate of 5.2%. Amid a volatile global economic scenario and lingering risks to domestic inflation, it was likely that the RBI would follow a wait-and-watch strategy. The MPC is maintaining tight monetary conditions by continuing its stance of withdrawal of accommodation. On the domestic front, inflation numbers will be important to watch; the expectation is that inflation could recede further and that could trigger volatility for the currency. But importantly, it will be the FED, ECB, and Bank of Japan policy statements that will be guiding the market. The Federal Reserve is expected to take a pause on raising rates as it will look to evaluate the impact of recent rate hikes. Snapping a two-week falling streak, India’s foreign exchange reserves saw a rise of $5.929 billion and stood at $595.067 billion as on June 2, 2023, as per RBI data updated Friday. Also, the forex reserves had fallen largely because of the RBI’s intervention in the market to defend the depreciating rupee against a surging US dollar. Typically, the RBI, from time to time, intervenes in the market through liquidity management, including through the selling of dollars, with a view to preventing a steep depreciation in the rupee.

Dollar Index lost to 103.56, down by 0.46% last week against the previous week’s close of 104.02

The US Dollar fell -0.46% last week, which was the worst 5-day performance since the middle of April. Demand for the haven-linked currency weakened as stock market sentiment continued improving. Most of Dollar’s underperformance occurred on Thursday when an unexpected surge in US jobless claims poured some cold water on expectations of a rate hike from the Fed Reserve in July. Still, the data was not enough to haunt financial markets in terms of an impending recession, although that could still change. The US currency was pinned near a one-month low against the British pound and the Aussie at $1.2568 and $0.6740, respectively, with a holiday in most of Australia making for thinned trade. Volatility for the dollar against its major crosses also remained low as no major cues were lined up from the US. In the case of the major crosses, be it Euro, Pound or the Japanese Yen volatility remained low and it was the intraday moves in the dollar Index that triggered momentum for the pairs.
What lies ahead?
Rupee spot (CMP:82.43 ) to hold its tight range, unless any unexpected global economic data comes out.
  • There are 2 key economic event risks in the week ahead for the US Dollar. The first will be May’s US inflation report on Tuesday. Headline CPI is expected to tick much lower to 4.1% y/y from 4.9% prior, in part due to the drop in commodity prices. However, core inflation (which strips out volatile food end energy prices) is seen ticking lower to 5.3% y/y from 5.5% prior.
  • The latter could be annoying for the Fed, but altogether, the data may continue to point in the direction of cooling inflation. Speaking of the central bank, the very next day will be June’s FOMC monetary policy announcement. The Fed is widely expected to keep benchmark lending rates unchanged. Although, it should be noted that recently there have been hawkish surprises from the RBA and BoC.
  • Where things will probably get more interesting is the central bank’s language about interest rates. That is because financial markets are pricing in about a 2/3 probability that the Fed could continue tightening next month. As such, do not discount the likelihood of a turn higher in the US Dollar in the week ahead. Also, keep in mind that if economic conditions unexpectedly deteriorate, haven demand may boost Dollar.
  • The rupee is likely to hold its ground amid softening of crude oil prices & consistent FII inflows into the domestic market. Meanwhile, investors will keep a close eye on inflation data from India after the central bank kept its rates steady last week and CPI data from the US ahead of the US Fed Reserve interest rate decision.
  • USDINR Jun Fut is expected to face a hurdle near 82.70 and move back towards 82.30. Only a close below 82.30 would weaken the pair towards 82.10.
    (USDINR Jun contract) CMP: 82.47
    WEEKLY STRATEGY
    Buy on Dips towards 82.30Upside expected 82.75