The rupee was at 83.29 against the dollar, up from 83.34 on Friday. The currency traded in a choppy session on Friday, affected by a technical incident and a lifetime low of 83.42. The Reserve Bank of India stepped in to help the rupee.
The RBI will systematically defend the currency as it has in recent months, however, the range in the USDINR has now shifted higher.
While the rupee has broken its long-enduring support of 83.30, a clearer picture will only emerge closer to Wednesday or Thursday, post the Diwali holiday mood and US CPI due this week.
India’s foreign exchange reserves rose by $4.7 billion to $590.78 billion as of November 3, according to the Reserve Bank of India’s data released on Friday. The 2nd consecutive week of addition in India’s forex exchange took it to a 7-week high mark. The Reserve Bank of India has increased its forex reserve to deal with potential eventualities.
Apart from US Treasury yield, foreign capital outflows and a rise in crude oil prices also pressured the Indian currency. This week, if the rupee maintains its value around 83.40 levels next week, it may end in a weaker range, However, it is believed that the rupee is unlikely to underperform as a sharp decline in its value will be cushioned by RBI’s intervention to curtail the fall.
The Dollar Index gained to 105.86, up by 0.80% last week against the previous week’s close of 105.02
The dollar emerged as the strongest currency, buoyed by Fed Chair Jerome Powell’s hawkish remarks. Despite this, the greenback stopped short of surpassing the previous week’s highs against major counterparts, and it remains the weakest performer for the month so far.
At an IMF event, Powell expressed doubt about the current monetary policy’s efficacy in reducing inflation to the Fed’s 2% target. Market reactions to Powell’s statement are evident in the adjustments of Fed funds futures. While the likelihood of a rate hike in December is still modest at 9.1%, expectations for January have surged to over 20%, marking a significant rebound from a mere 8.7% a week earlier.
The dollar index to remain steady ahead of US CPI data, which is expected to offer further clues this week on whether the Federal Reserve has more work to do to tame price pressures. Moreover, the crucial viewpoint will be awaited until Tuesday, especially after the Fed’s policy meeting this month tempered its hawkish stance although Fed Chair Jerome Powell last week hinted that the battle against inflation may not be over yet.
Dollar index’s surge raises questions that, is merely a recovery from recent losses, or the beginning of a new uptrend. While Dollar gains support, rising risk-on sentiment in the markets seems to limit its ascent. On the other hand, the potential for a bounce in treasury yields could bolster Dollar’s position. The tug-of-war between bullish and bearish forces could continue, and it remains uncertain which one will ultimately prevail.
Additionally, Moody’s, the global rating agency, dropped a bombshell last week by announcing a cut in the country’s rating outlook from stable to negative. They cited the elevated level of interest rates and deterioration caused by ineffective fiscal measures for their decision.
What to Watch: Next week the economic calendar has a range of high-impact economic releases with the latest UK, Euro, and US inflation reports the standouts. Chinese New Yuan Loans over the weekend will also be worth watching as the world’s second-largest economy looks to try and boost faltering growth.
What lies ahead?
The rupee spot (CMP: 83.27) remains slightly volatile, The October US inflation report will steal the limelight for the week
Looking ahead to next week, the spotlight will be on the October consumer price index report. With the Federal Reserve hypersensitive to incoming information and mindful of potential upside inflation risk, the latest CPI figures will take on added significance and carry extra weight for financial markets. Against this backdrop, volatility could spike in the coming trading sessions.
Broadly speaking, CPI outcomes that cause a hawkish repricing of interest rate expectations should be bullish for the dollar. The opposite is also true: a weak CPI report that reduces the likelihood of additional FOMC tightening should put an end to the recent US dollar rally by weighing on US Treasury yields.
Wednesday’s release of softer retail sales figures could prove a dollar negative and may finally suggest that tighter credit conditions have caught up with the US consumer
qMost awaited breakout happened last week i.e. catching USDINR above 83.30 levels on a closing basis as well. Too many dilemmas at once arise so as to – why the RBI today decided to (allow the rupee to drop below 83.30), it’s impossible to say. What is important is what happens over the next few days – whether 83.30 will now be the new bottom (for USDINR) and how the RBI will manage the currency from here on out.
This week will be very important to see if a new range has been made. For Monday, trading activity in the rupee will be low on Monday due to the Diwali holiday and he will eye moves Wednesday onwards.