Indian rupee marked the first weekly gain in three following rallies in the domestic equities backed by foreign fund inflows. A fall in crude oil prices and the expectation of a normal monsoon rain may drag inflation lower in the coming months. Over the previous week, INR has managed to stem the momentum of Dollar strength and the bias has again turned neutral. USDINR is oscillating in a narrow range below 83.00 as investors turn cautious due to unresolved US debt-ceiling issues. The RBI is expected to hold interest rates ahead as India’s inflation is decelerating. Foreign Investors have shown consistent buying almost throughout the month of May. This is the 3rd consecutive month where the FIIs are on the net buyer’s side. Up till now in May, they have infused Rs 20606 crores highest since November 2022. This infusion is helping the Indian rupee to gain back its value against the Dollar index it is constrained to depreciate further.  On the Indian Rupee front, investors are shifting their focus to the interest rate decision by the RBI, which is scheduled for the first week of June. Inflation in India also shows signs of peaking, with headline inflation dipping back to the 2-6% target range in April. This provides RBI scope to stay on hold for the foreseeable future. At the same time, it is too early to discuss rate cuts by RBI. India’s foreign exchange reserves saw a fall of $6.052 billion to $593.477 billion as of May 19, 2023, per RBI data updated on Friday. The drop in the reserves has snapped two consecutive weeks of increases. India’s total FCA saw a dip of $4.654 billion to $524.945 billion. Gold reserves fell by $1.227 billion to $45.127 billion while SDRs fell by $137 million to $18.276 billion.

Dollar Index gained to 104.21, up by 0.98% last week against the previous week’s close of 103.20

Last week saw the US Dollar dominating the currency markets, with a surprising rally encouraged by market sentiments flipping in favor of the Fed rate hike in June. An atmosphere of growing optimism spread through the scene, supported by increasing confidence in a forthcoming agreement on raising the US debt ceiling, thus striking off a government default. US President Joe Biden and Kevin McCarthy reached a tentative deal to suspend the federal government’s $31.4 trillion debt ceiling on Saturday evening but were unable to cheer market sentiments. US Treasury two-year yields climbed for an 11th straight session after data showed a pickup in inflation. Friday’s PCE inflation showed that inflation remains high and sticky, causing yields to firm up, lending support to the Dollar. There was an unexpected and drastic U-turn in market expectations for Fed’s June meeting. Fed funds futures are now pricing in a 64.2% chance of another 25bps hike to 5.25-5.50% on June 14. A week ago, there was just a 17.4% chance of a hike with an overwhelming 82.6% chance of a hold. Overall, in the week gone, the combination of fix-related greenback buying and higher Treasury yields after the PCE data, and comments from the Fed members has put the dollar nearing the two-month high.

What lies ahead?

The rupee spot (CMP: 82.61) remains range bound amid Debt ceiling resolution and macroeconomic data.

• India Rupee to remain in range for this week as well, we expect swing movement between 82.30-82.95. The month-end dollar inflows, the central bank’s intervention, and lower crude oil prices could keep the downside limited in the coming days.
• However, with inflation remaining sticky, jobs data in this week, may lead to further Dollar strength and cause a USDINR move above 83. But, the debt ceiling increase, once finalized, can lead to some Dollar weakness as risk aversion.
• dollar index might hold above 103.50 levels supported by growing expectations of further rate hikes by the US Fed though news that a debt ceiling deal had been finalized drew some of the safe haven bids away from the index.
• for this week, whether the dollar sustains the rally that we’re seeing, it’ll depend on particularly the wages data, average earnings within Friday’s payrolls report, and CPI before the Fed as well