The Rupee spot appreciated during the last week of FY 22-23 as Fed’s current liquidity injection weighed on the dollar index while foreign money inflows added to the gains in the domestic currency. Thus, despite a rally of more than 9% in the crude oil prices, the rupee gained around 36 paise during the week ended 31st March. March was the first month in the current calendar year when FIIs money flow turned positive at 610 million. India’s forex reserves rose by $5.98 billion to a six-week high of $578.78 billion during the week of 24th March. India’s foreign currency assets (FCA), the biggest component of the forex reserves, saw a rise of $4.38 billion to $509.72 billion. India’s gold reserves rose by $1.37 billion to $45.48 billion. India’s current account deficit (CAD) has narrowed to $18.2 billion or 2.2% of GDP in Q3FY23 from 4.4% in Q2. The CAD for Q3 has printed well below expectations, resulting in a compressed print of US$67 billion for April-December 2022. With a considerable compression in the average trade deficit in Jan-Feb 2023, the size of the CAD is expected to recede further to around $10-12 billion in Q4 FY2023. The RBI monetary policy decision is due this week and a quarter-point rate hike is expected in line with the other major central banks. India’s retail inflation jumped above the RBI’s upper target band of 6% in the first two months of 2023. Persistently high core inflation, over 6% for 17 straight months, is also holding back policymakers from easing on rates amid early signs of a demand slowdown.

Dollar Index fell to 102.51, down by 0.59% last week  against the previous week’s close of 103.11

The U.S. dollar drifted lower as returning confidence in the global banking sector weakened demand for the safe haven currency while slower U.S. consumer spending growth boosted hopes the Federal Reserve would be less aggressive in hiking interest rates. However, oil prices rebounded from 15 months low, rallying more than 9% last week and surging about 6% today after OPEC announced a fresh production cut. A rally in oil will keep inflation elevated and put pressure on the Federal Reserve to go on raising interest rates. US two-year yields jumped eight basis points to 4.11%, while the benchmark 10-year yield climbed five basis points to 3.52%.

The Rupee spot (CMP: 82.37) might remain volatile and trade in a range of  82.00 – 82.90

The USDINR pair is expected to remain volatile this week ahead of the RBI policy decision and a slew of crucial US economic data including the Unemployment rate that could pave the way for the Fed’s stance. Losses could be seen in the early part of the week as oil prices climbed more than 6% on a surprise OPEC output cut announcement that raised inflationary concerns. However, narrowing CAD and sufficient forex reserves would limit the losses and we may see gains later in the week. As far as the dollar is concerned, the surge in oil prices has once again raised inflationary fears and might be one of the reasons for the Fed to consider another rate hike. However, the same will depend on how far oil prices rally sustains. Also, Friday’s unemployment rate data would be crucial to watch and the major indicator for the Fed’s rate decision.