Indian rupee spot depreciated by 0.37 paisa and closed at 82.17 vs previous week’s close of 81.80

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The Indian rupee weakened past 82.1 per USD, the lowest in three weeks, pressured by a firmer US dollar and dovish expectations for the Reserve Bank of India. Lower food and energy prices allowed retail inflation in India to fall to 4.7% in April, under expectations of 4.8% and dropping further below the central bank’s upper target of 6%. The result strengthened expectations that the RBI will afford to prioritize economic growth and refrain from delivering further rate hikes, pressuring the local currency. To add, recession concerns worldwide are likely to keep crude oil prices sharply below the peaks from last year, further easing inflation expectations. Since the fourth quarter of 2022, the rupee has repeatedly fallen to its historical low of 83 before being rescued by RBI intervention due to an unbalanced current account and a comparatively soft monetary policy. India’s foreign exchange reserves saw a rise of $7.196 billion to 595.98 billion as on May 5, 2023, data from the Reserve Bank of India showed on Friday. Overall FCA r(Foreign currency assets i.e Non-USunits)rose by $6.536 billion to $526.021 billion followed by Gold reserves saw a rise of $659 million to $46.315 billion while Special Drawing Rights (SDRs) dipped by $19 million to $18.447 billion.

Dollar Index gain to 102.68, up by 1.26% last week against the previous week’s close of 101.40

The U.S. dollar rose to a five-week high against major peers by the end of the previous week as the safe-haven currency benefited from inflation worries at home and growth concerns globally, extending gains after its biggest weekly increase since September. The greenback was cheered up by a rise in Treasury yields after a survey of U.S. consumers’ long-term inflation expectations jumped to the highest since 2011, putting a possible Federal Reserve rate hike next month back in consideration. After the consumer confidence data signaled stagflationary expectations in the US economy Dollar index showed strength overall. While consumer confidence was reported significantly dented, inflation expectations remained high. The debt ceiling standoff in the US Congress is starting to weigh on the markets and consumer confidence.  Along with that, the CPI remains sticky, and markets are worried about any data which indicates a hawkish Fed and the Michigan survey on Friday was one such release. This week has a few Fed speakers scheduled, including Powell on Friday. The dollar is supported for now, both by safe-haven buying, and inflation worries. Markets need the Fed to cut rates in the later part of the year, and the Fed speaker comments will be watched for indications of the rate path.

What lies ahead?

Rupee spot (CMP: 82.29) Dollar strong on recession and inflation fears. Rupee broad range holds for now (81.80-82.45 weekly closing basis).

  • Rupee holds the range of 81.80-82.45 and the bias has shifted to neutral. Unless the FOMC member comments cause unforeseen turmoil, the default scenario remains that of a range-bound Rupee.
  • USDINR remains in its current wide range, and the bias has shifted to neutral. The large trigger events have come and gone, but have failed to set a meaningful direction for the Rupee continuously.
  • The next relevant data point is the PCE at month’s end. Retail sales and industrial production are the highlights for US data next week.
  • The greenback rally will likely persist this week expecting an appreciating level near 103 levels, given the asymmetric setup around the US debt ceiling. US assets will be the primary beneficiaries if there’s meaningful progress toward a resolution.
  • In contrast, a breakdown in talks will prompt global deleveraging that would support the dollar as the world’s reserve currency. A successful raising of the debt ceiling would permit this week’s packed line-up of Fed speakers to guide more hawkish, prompting higher yields and further dollar support.