Indian rupee spot appreciated by -0.24 paisa and closed at 82.94 vs previous week’s close of 83.18

  • The Indian rupee registered the first weekly gain in 4 after the announcement of India’s sovereign bonds inclusion in the JP global bond index and crude oil retreated which rallied more than 40% from the May low.
  • The rupee had climbed to near 82.80 against the US dollar following JPMorgan’s decision to include India in its flagship emerging market index, but it could not sustain the rally and was currently slightly weaker than what it was before the inclusion
  • INR was the top performer among the Asian currencies, marking gains of 0.3% to 82.94 a US dollar. The outperformance in Rupee may not last long as inflows will knock the market next year and in a staggered manner. While on the other side, the greenback remained in demand against major currencies after a so-called hawkish signal from the Fed in a recent policy meeting.
  • India’s possible worsening of the current account deficit and risk of equity outflows are other reasons for the bearish outlook on the rupee, along with a higher dollar and a weaker Chinese currency.
  • In the week gone, foreign institutions sold worth $684mn equities and $142mn debts. India’s Forex kitty dipped for the second week in a row to $593.04bn, for the week ending Sept.15, as per the RBI’s weekly statistics.
The Dollar Index gained to 105.58, up by  0.25%  last week against the previous week’s close of 105.32
  • Last week started a bit slow but ultimately the Central Bank’s heavy data calendar of Wednesday and Thursday delivered and a September trend finally arrived with yields up, the dollar up and equities down.
  • Dollar Index rose 0.25% to $105.58 and closed higher for the 10th straight week while the sea of red was seen in global equities.
  • Despite a confluence of favourable conditions that are typically Dollar bullish decidedly hawkish Federal Reserve, plummeting stocks, and soaring yields the Dollar’s response was unexpectedly tepid last week. While it managed to gain ground against European majors and Yen, it faltered when squared against the robust commodity currencies. 
  • The US markets faced a turbulent last week after the Fed’s hawkish hold at 5.25-5.00%. While the Fed’s messages were clear that interest rates are going to stay “higher for longer”, overall developments argue that investors are much less convinced on the higher part than the longer.
  • However, market sentiment doesn’t seem wholly aligned with the Fed’s projections. Current indications from Fed fund futures underscore only a 26.3% likelihood of a hike in November, and 46.3% in December. On the other hand, there’s a whopping 90% chance that by 2024-end, interest rates will have reverted to 5.00-5.25% or even lower.
  • The yen weakened against all of its Group-of-10 currency peers after the Bank of Japan stuck with its ultra-easy stimulus. The British pound lost 1.15% vs. the dollar, the largest one-week percentage decline since Friday, Aug. 25, 2023, amid weak economic data and a surprise hold from BoE.
What lies ahead?
The rupee spot (CMP:  83.15) remains vulnerable to global developments, higher US yield and dollar strength.
  • This week will see the 3rd quarter coming to a close. The dollar has had a strong summer, gaining against all G10 currencies. Looking at the near-term outlook, this trend seems unlikely to change. Last week’s FOMC’s dot plot projections confirmed the Fed is not ready to call the end of the tightening cycle just yet, while a more aggressive “higher for longer” narrative emerged as the median 2024 rate forecast was revised to 5.1%.
  • This week will be quiet on the US data front, and the focus will mostly be on Fed speakers, later this week we’ll also hear from Fed Chair Jerome Powell. In general, Fedspeak should not be as effective as data in moving the market, but in a quiet, post-FOMC week, they can set the tone amid some quarter-end flows. DXY remains on track to break above 106.00 in the short term.
  • USD INR bias remains slightly depreciative but at a slower pace than other Asian currencies. The relentless move in US yields does not bode well for risk assets – especially for Rupee. While the bond index inclusion euphoria could help the Rupee in the short term, the actual flows are still a few months away. If the US 10y cracks significantly above 4.5%, the Rupee has no choice but to depreciate.
  • Meanwhile, Month-end dollar demand from importers, including oil companies, will keep the rupee under pressure. Investors will now be keeping a keen eye on US 2nd Quarter GDP data and core PCE inflation numbers due later this week, for further cues on how the US Federal Reserve may act on policy.

Leave a Reply

Your email address will not be published. Required fields are marked *