Rupee spot sees no respite from RBI’s rate hike and depreciated to a fresh record low of in the previous week, as sentiments were dampened by a surging dollar index and elevated crude oil prices. Oil rose more than 16% on OPEC’s decision to cut output, which might weigh down on CAD, as oil accounts for a major chunk of domestic imports. Freely falling Rupee will only compound the effect. Sentiments were further dampened after JPMorgan Chase & Co. said they are keeping Indian government bonds off its emerging-market sovereign bond index for now, citing investment hurdles that must be resolved for the inclusion to take place. Meanwhile, World bank downgraded India’s FY23 GDP forecast from 7.5% to 6.5%.  After two months of inflows in domestic securities, FII’s turned net sellers in August and September. Lag in bond inclusion also prompted outflows from debt markets. India’s foreign exchange reserves fell to $532.66 billion in the week ended 30th September, the lowest level since July 2020. Still, the pace of intervention has gone down significantly, compared  to the fall in Rupee.

The greenback see sawed, touching a low of 110 earlier in the week, after a disappointing Manufacturing PMI and job openings data, while bounced back above 112 levels, aided by a robust Labour market data. Non-farm payrolls for September showed US economy added 263K jobs and unemployment edged lower to 3.5%. Jobs market is something which Fed considers for gauging economy and a better data improved the conviction that a fourth 75 bps hike is on its way for November meeting. Meanwhile, Fed officials continued with the hawkish rhetoric calling for higher rates for longer. Federal Reserve Bank of New York President John Williams said the US central bank has yet to raise interest rates to levels that are restricting economic growth, and tightening still has “significant” ways to go.

Rupee spot might trade in the range of 82 – 83/83.5 levels with a depreciation bias for the week.

India Rupee might continue the downward trajectory amid a buoyant dollar index, widening yield differentials with US and increased importer hedging demand. Increasing FII outflows and sell off in global risk assets adds to the pressure. Domestic inflation data is due on Wednesday and investors will be paying close attention to it. Higher inflation will lead to more rate hikes from RBI, at the cost of tampering our growth. Falling Rupee and rising crude oil prices might lead to higher trade deficit, which has recently eased from a record high of $30 billion in July. US CPI data for September and FOMC meeting minutes will be the major focus for the week. Hawkishness is expected in meeting minutes. Though headline CPI is expected to ease towards 8.1% in September, an uptick in core CPI might prompt Fed to deliver another 75 bps hike in November. Worsening macro factors, low banking system liquidity and falling import cover might deter RBI from heavily burning forex reserves.