Rupee has been range-bound for most of October, with volatility near its lowest in many years. RBI has been instrumental in keeping volatility muted, intervening regularly in spot, non-deliverable forwards and futures
With the headwinds such as US yields, oil risk, a well-supported dollar and portfolio outflows. All through this, the rupee has basically done nothing currency didn’t react negatively and it did so, there was RBI standing strong to control the volatility.
Higher US yields and the Middle East issue have soured risk sentiment, prompting foreign investors to withdraw money from Indian equities, with outflows reaching nearly $2.5 billion this month. The rupee failed to capitalize on the momentum in the face of persistent dollar demand from importers and equity-linked outflows
The central bank likely sold dollars near 83.25 levels but the intervention was not aggressive therefore trading volumes were muted. Reserve Bank of India’s stern defence of the rupee has limited further depreciation, keeping the currency in a narrow range.
India’s foreign exchange reserves resumed their losing streak to fall to $583.53 billion as of Oct. 20, compared with $585.90 billion a week earlier, data from the Reserve Bank of India showed on Friday. Reserves have dropped sharply in recent weeks, down by $14.2 billion in five weeks to Oct. 6, a five-month low. However, they rose by $1.16 billion in the week to Oct. 13
The Dollar Index gained to 106.56, up by 0.37% last week against the previous week’s close of 106.16
- The US dollar’s rally has stalled ahead of the Oct. 31-Nov.1 FOMC meeting. Part of the reason for the consolation is dovish rhetoric from Fed officials earlier this month, pointing out that tightening in financial conditions as a result of the jump in yields has reduced the need for imminent tightening. As a result, markets widely expect the Fed to hold rates this week.
- US Fed chair Powell, while acknowledging the tightening in financial conditions recently, left the door open for higher rates. Furthermore, solid US economic data and the perception of higher for longer rates have triggered a pushback in rate cuts in 2025.
- The US 10Yr Treasury yield, on the other hand, seems to be struggling to get a decisive break above the psychological 5% mark. It looks like the market is waiting for some trigger to move either way from here.
- On economic events, the ECB’s move this week was highly anticipated by many. After a streak of ten rate hikes, the bank decided to hit the pause button. Meanwhile, the robust US Q3 GDP growth surpassed market expectations.
What lies ahead?
The rupee spot (CMP: 83.23) remains a stable currency but FED, BOJ, and BOE policy statements this week might keep up the volatility
- The main focus in the US next week will be the Federal Reserve policy meeting, where we aren’t expecting any change to policy rates. The ECB will be eagerly awaiting inflation and GDP releases in the Eurozone, while over in the UK, all eyes will be on Thursday’s Bank of England meeting.
- FOMC is expected to repeat the same tone – that they are data dependent and rates could remain high for a long. BOJ policy is important for global markets, as any change to the dovish stance means lower liquidity flow. Despite the Fed’s tight liquidity stance, global liquidity has risen due to BOJ and PBOC contributions a major reason why the global economy has been buffered from the sharp rate rises.
- We could witness the rupee appreciating back at least 83 levels in the coming week amid the expectation of a correction in the dollar and US treasury yields. However, elevated crude oil prices and risk aversion in the global markets may prevent sharp gains in Rupee.
- USD INR is to remain exceptionally stable and is expected to be so unless the data points this week spring a surprise. The ongoing war remains a risk factor for the Rupee, but only if there is a major escalation with US backing. Meanwhile, the Rupee will be unable to hold such dragging factors until the foreign capital inflows improve substantially, which looks a bit of a tight call.