Rupee spot touched an all-time low of 83.03 in the previous week before paring the losses on suspected RBI intervention and fall in the greenback. RBI policymakers signaled that the central bank would pause its hiking path in its next meeting, as growth concerns should become the priority despite stubbornly high inflation.  The latest data showed that retail prices rose by 7.4% annually in September, marking the ninth consecutive month where inflation surpassed the central bank’s upper target of 6%.  Equity markets rose more than 2%, aided by DII buying. FII’s were mostly sellers in the previous week and FPI net investments witnessed an outflow of Rs.7,186 crores in October.  As per recent data released by the RBI, India’s foreign exchange reserves tumbled to a fresh multi-year low of $528.37, 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 greenback has weakened amid concerns of policy pivot from Fed. There is a speculation that some Fed officials are concerned about over tightening. San Francisco Fed President Mary Daly echoed this view, saying that the central bank should start discussing the potential of a smaller rate hike in December.  Meanwhile, US 10-year treasury yields bottomed below 4.2%, moving further away from an over 14-year high of 4.3% reached last week, on hopes that the Fed could slow down the pace of interest rate hikes later this year.  Adding oil to the fire, Bank of Japan intervened in the forex market after Yen spot touched a fresh 32 year low of 151.94 against dollar. Dollar came under further selling pressure as investors welcomed the news that former chancellor Rishi Sunak will become the new prime minister and Pound rallied.

Outlook for the week – Rupee spot (CMP:82.75) might trade in the range of 82.5 – 83 levels :

USDINR might consolidate for the week and trade in the range of 82.5 – 83 levels against dollar. Having said that, weak macro cues, persistent FII outflows and slower pace of RBI rate hikes might lead to orderly depreciation of Rupee in the medium term. Indian exporters are holding back on dollar sales on hopes of a further slide in the rupee, eyeing a windfall as the local currency plumbs record lows this year, according to Reuters.

Dollar index might be under pressure for the week ahead of ECB and BOJ meet, while dovish comments from Mary Daly and ease in treasury yields might further weigh. Meanwhile, US S & P Manufacturing PMI contracted for the first time since July 2020, which might improve the conviction that Fed might go slower from December.

A slew of economic data are also due this week, including durable goods orders, Q3 GDP and PCE inflation. Umich 1 year inflation expectations will also be closely watched after as it began rising recently.

ECB meeting is due on 27th and Bank of Japan due on 28th October. ECB is expected to hike rates by 75 bps and sound hawkish. In the event of missing expectations, we might see a profit booking in Euro.