• The rupee last week failed to capitalize on the weakness in the dollar index amid persistent dollar demand from importers. Following a week of overall soft US economic data that diluted possibilities of further Fed rate hikes.
• However, looking at the forefront, India’s economy stands at resilience the most recent monetary policy report highlighted a 6.5% growth forecast for FY24, one of the strongest amongst regional peers and expected to come on the back of 7.2% growth in FY23. The Rupee has also remained largely resilient against a backdrop of volatile EM currencies.
• The rupee in the last few weeks has consolidated in a range of 82.30 and 83.20 despite economic concerns in China and a surge in the dollar against its major crosses. During the month, economic concerns in China also led to weakness in the rupee.
• Volatility was curtailed after some sources suggested that the RBI had asked banks to stop taking fresh arbitrage positions in the NDF market. Suspected dollar selling was to the tune of $ 1 billion also triggered a move for the rupee. Weakness for the rupee was curbed by active intervention by the RBI and a fall in the reserves justifies the reasoning.
• India’s forex reserves dropped by $30 million to $594.858 billion for the week ended August 25, according to the latest RBI data. In the previous reporting week, the overall reserves had dropped by $7.273 billion to $594.888 billion.
• The RBI asked banks to set aside a larger part of its incremental deposits to tighten liquidity. According to the decision, banks will now have to maintain an incremental CRR of 10% and this did hit the overall market sentiment. On the domestic front, inflation rose sharply to 7.44% in July from 4.87% in the previous month. Vegetable inflation was the highest contributor to an uptick in inflation.

The Dollar Index gained to 104.24, up by 0.15%  last week against the previous week’s close of 104.08

• In a week marked by high volatility, the Dollar proved resilient, closing within its established range against other major currencies after an intra-week selloff. Indeed, sentiment has shifted to favour near-term upside for the Dollar, which is likely to maintain its strength at least until the Fed releases new economic projections later this month.
• The dollar faced significant volatility last week, flirting with the risk of a near-term bearish reversal before making a sharp U-turn on Friday. This renewed bullishness keeps the prospect of more upside in the DXY alive, Although not without hurdles.
• contrastingly, the EUR emerged as the week’s weakest performer amid rising expectations that the ECB will hit the pause button on interest rate changes this month. GBP lingered not far behind, showing vulnerability against the resilient Dollar.
• The eagerly watched non-farm payroll data gave investors a balanced view of the US economy, The labour market showed just enough loosening to deter immediate Fed rate action, but not so much as to raise concerns about a recession. Supplementing this positive outlook, recovering ISM manufacturing data offered a glimmer of hope that the worst may be over for that sector.
• Market expectations for the Fed to maintain its current rate held steady, with Fed fund futures now pricing in a 94% chance of a hold this month. The likelihood of another rate hike this year has dipped to below 36%. There’s a 65% probability of being priced in for a rate cut by May of next year—a projection that appears overly optimistic given that overall economic growth is outpacing the trend and inflation is well above the Fed’s target.

The rupee spot (CMP:  82.72) is in range but biased towards weakness.

• All eyes will now be on the Fed’s new set of economic projections and dot plot, scheduled for release on September 20. These could potentially recalibrate market expectations and pricing metrics significantly. Markets are betting that the Federal Reserve will hold interest rates steady this month, and see a greater chance that it will not hike rates further this year.
• A string of economic data highlighting moderating inflation as well as an easing labour market has added to the impression the US economy is cooling without slowing sharply, reinforcing hopes that the economy is set for a soft landing.
• Although, Since the 24th of August, the Rupee spot has been fluctuating within a tight range of 82.50 and 82.80 levels, presenting a narrow range of movement. Short-term movement in the Rupee might still be restrained– until the CPI data and the FOMC meeting.
• Global indicators remain mixed, as surging US bond yields are bolstering the US Dollar Index, while hopes of a Chinese stimulus are boosting Asian and EM against the US Dollar. Industrial commodities such as base metals and energy prices are performing well. Consequently, there may not be a definitive catalyst for the USDINR to break out of this narrow range.
• Dollar index remains well supported but unable to make a significant move higher as the G7 monetary policy remains in a state of flux. The August inflation data which will be published next week will now be eagerly awaited to provide a more definitive view of the FOMC meeting.