The rupee spot gained strength in the previous week, amid broad dollar weakness and improved risk sentiments on expectations of a Fed pivot. Still, every dip was bought into, as Rupee’s more general fundamentals remain bearish.  Meanwhile, the monetary policy committee of the Reserve Bank of India will hold a surprise off-cycle meeting on 3rd November. The additional MPC meeting will likely be held to discuss the content of the letter that the RBI must write to the government explaining why it missed its inflation mandate, and the roadmap to bring it back within its 2%-6% aim.  Equity markets rose in the previous week, aided by broad risk-off sentiments owing to an ease in US treasury yields and FII selling momentum has also faded in the past few days. As per recent data released by the RBI, India’s forex reserves tumbled to a fresh multi-year low of $528.37 billion, down by $4.5 billion in the week ended 14th October, led by a decline in its foreign currency assets, as the central bank intervened to rescue the domestic currency’s fall against the US dollar.

The dollar index fell below 111 levels, down by 1.12%, against the previous week’s close of 112. The greenback eased for the second week in a row, amid ease in US 10 treasury yields towards 4%, hoping the Federal Reserve could slow down the pace of interest rate hikes from December. There was some speculation that some Fed officials are concerned about over-tightening. The greenback also came under heavy selling pressure against the Chinese Yuan amid reports of government intervention in currency markets. However, the dollar index pared early losses and closed above 110 levels towards the end of the week, supported by better-than-expected economic data. The US economy grew an annualized 2.6% on quarter in Q3, rebounding from a contraction in the first half of the year, while consumer spending rose by 0.6% in September.

Rupee spot (CMP:82.38) might trade in the range of 81.8 – 83 levels, with a depreciation bias 

For USDINR, the bias remains towards the upside, on the backdrop of a widening trade deficit and a slower pace of rate hikes from RBI, prompting outflows. Though rate hikes are not expected in RBI’s off-cycle meeting on 3rd Nov, we don’t deny such a possibility. Fed meeting is on 2nd November and in case of the post-meeting rally in the dollar index, RBI will have no option, but to act. A slew of domestic economic data is also due this week and investors might stay cautious.

Investors are expecting pivotal language from Fed in this week’s meeting. If officials are moving to a 50 bps rate hike in December, they would want to prepare the market for that decision without prompting another sustained rally. Equities rallied in July and August on expectations that the Fed might slow rate rises and that conflicted with the central bank’s goals because easier financial conditions stimulate spending and economic growth, leading to higher inflation.

In the November FOMC meeting, we expect Fed to hike rates by 75 bps and hawkishness in Powell’s statements, along with consensus for a slower pace of hikes from December, without triggering a  market rally. In the event of a dovish language from Powell, we might see further weakness in the dollar index.

Bank of England is expected to deliver the biggest rate hike since 1989 on 3rd Nov, by a hefty 75 bps amid surging inflation, though the UK economy is already under stress. The pound might come under profit booking post the meeting, as the focus might shift towards the economy and recession concerns. Still, prospects of tax hikes might limit any sharp downside.