The Rupee spot depreciated sharply last week as the US banking crisis initiated by the Silicon Valley Bank’s crash led foreign investors to move out from the emerging market’s riskier currencies and invest in the safe haven dollar. Losses were pared later in the week as the broader market sentiment improved following the rescue of crisis-hit banks in the United States and Europe. Meanwhile, narrowing the trade deficit, RBI’s intervention along with heavy selloffs in crude oil prices exerted pressure on the USDINR pair. Foreign Institutional Investors (FIIs) who garnered massive inflows till 8th March, became the net sellers last week with an outflow of 7,953.66 crores. India’s Forex reserves were back on the downside and hit a 3-month low in the week ended March 10 to $560 billion, down by $2.397 billion from the previous week. India’s merchandise trade deficit narrowed to USD 17.43 billion in February 2023 from USD 18.75 billion in the same month last year, compared to market expectations of a USD 19.0 billion gap. It was the smallest trade deficit since January 2022, as imports declined 8.2 percent to USD 51.31 billion amid a weakening domestic demand due to a rise in the cost of living and higher borrowing costs. The annual consumer price inflation in India slowed slightly to 6.44% in February 2023 from 6.52% in January, compared to market forecasts of 6.35%. The inflation stayed above the Reserve Bank of India a target of 2-6% for a second consecutive month, after a slowdown in the last three months of 2022, due to the rupee depreciation and as companies are passing on some input price increases.

Dollar Index fell to 103.71, down by 0.83% last week  against the previous week’s close of 104.35

The dollar rose early last week amid fears of global banking turmoil that boosted safe-haven demand, but later on, gave most gains and weakened as haven bids waned after a US bank rescue plan calmed global jitters. During market turbulence, investors sell risky assets and turn to US Treasuries and the US Dollar, However, this time, the dramatic shift in expectations for the US Fed policy gave a shock and USD fell from 105 to 103. Treasure yield tumbled last week with the two-year yield declining as much as 36 basis points to 3.80% and ended down close to 32 basis points on Friday.

The Rupee spot (CMP: 82.46) might remain volatile and trade in a range of  82.10 – 83.10 with an appreciation bias

USDINR pair is expected to remain on the tenterhooks in anticipation of a less-hawkish monetary policy stance from the Federal Reserve (Fed) after scrutiny of United States economic data of Feb. More losses are in pipeline for the pair as oil prices seem to be under pressure which might help ease CAD. This along with year-end fund flows might add to the gains in the rupee

As far as the dollar is concerned, market narratives have changed hands from hawkish to slightly dovish on US Fed rate hikes due to rising financial-stability fears. If Fed remains inflation-focused and guides for further hikes, then the dollar might strengthen. But the probability of the Fed turning cautious is and in such cases, dollar weakness might be obvious temporarily. Broadly speaking, by increasing the frequency of dollar loans,  it is very much clear that the central banks are very much in favor of supporting the financial systems. But, the dollar’s safe-haven appeal may remain intact if the banking crisis escalates further.