Indian rupee spot depreciated by 32 paisa and closed at 81.84 vs previous week’s close of 81.52

The Rupee spot depreciated for the second straight week, as the dollar rebounded against the basket of major currencies while domestic equities weakened and FIIs remained net sellers.  Rupee saw some strength during the budget day but lost most of it ahead of the major central bank’s meetings and key data including GDP numbers, PMI data, and the nonfarm payroll. RBI building back up its reserves, which hit a two-year low in October, exerted further pressure on the domestic currency Rupee’s weakness last week was also attributed to a strong outflow of Rs. 28,852 crores in Jan, FPIs sold Rs. 5,700 crores in equities as doubt over Adani’s sustainability raised questions over the health of the economy.  At center stage, this week will be the RBI monetary policy. Retail inflation for December 2022 fell to a year low of 5.72 percent, the second consecutive month when it has remained within the RBI’s tolerance band of 2 percent to 6 percent. India’s Retail inflation has eased more than expected in December, but the core inflation remains below 6%. Thus, it is important to see whether the RBI Monetary policy committee pauses the policy rate hike or increases it by 25 basis points to 6.50 %.  In its last meeting in January, the repo rate was hiked by 35 basis points to 6.25%.

The US Dollar rebounded from seven month low as BOE and ECB’s dovish tone was further supported by Friday’s nonfarm payrolls data which rose unexpectedly, spurring expectations that policymakers would have little choice but to keep interest rates elevated to combat inflation. Jobs growth accelerated last month as 5,17,000 new jobs were added, blowing away the 185000 consensuses, and almost double the +2,60,000 in December, which was revised up from +2,23,000. The unemployment rate ticked down to 3.4%, the lowest unemployment rate since 1969. Still, the greenback remains substantially lower from its September peak as the Federal Reserve delivered a smaller 25 basis point rate hike in a widely expected move, while Fed Chair Jerome Powell said that the disinflationary process has started.
Outlook for the week
The Rupee spot (CMP: 82.73) might trade in the range of  81.90 – 83.20 for the week with a depreciation bias
The domestic currency came under pressure after an eventful week that pushed the greenback higher. Focus this week will be on the RBI monetary policy decision wherein the expectation is for a 25 basis point rate hike considering the core inflation still hovering above the upper tolerance limit. Monitory Policy Committee’s guidance will be crucial for the rupee’s further direction. Added to this will be the RBI’s intervention in case of any major weakness in the rupee. In fact, India’s central bank was seen buying at lower levels till recently and may now intervene by offering the same to avoid any sharp fall. The dollar’s strength should remain intact this week as the US-China tensions fueled by an alleged Chinese spy balloon and yen weakness amid speculation on the appointment Bank of Japan governor are adding to tailwinds for the

dollar.   Further, data surprises could get markets listening to the slew of Fed speakers and drive the greenback substantially higher.

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