Rupee spot reversed the appreciation bias of last four consecutive weeks, due to pressure from India’s persistent current- account gap and the central bank building up its foreign- exchange reserves. Despite the sustained dollar weakness, rupee’s appreciation is being limited by the RBI building back up its reserves, which hit a two-year low in October. Rupee’s weakness last week was also attributed to the shaken investor confidence in India after Hindenburg Research published a report saying companies linked to Indian billionaire Gautam Adani had engaged in stock manipulation and accounting fraud. At the Center stage this week will the Indian Budget to be presented by the Finance minister on Feb 01 which is likely to show   India sticking with the fiscal consolidation path.  The current-account gap is likely to shrink to 2.8% of GDP in the financial year ending March 2024, from an estimated 3.2% this fiscal year as per Bloomberg Economics. Even so, that would still be high relative to the average of 1.5% of GDP over the previous 10 years.

FII’s have been selling for most of the trading sessions so far in 2023. Reopening in China have prompted funds to go overweight on Chinese stocks, which is trading at cheap valuations, leading to outflows from domestic securities. FPI net investments have seen almost Rs. 14,196 Crore outflows in January 2023.

Outlook for the week

Rupee may gain some strength ahead of the Union budget 2023 to be presented on Wednesday. But, at the same time we may see heightened volatility as it is going to be an eventful week with the focus on the Union budget, central banks meetings in US, UK, and Euro Area and US non-farm payrolls report taking central stage.  

Also, investors will follow inflation and GDP growth rates for major European economies and the fresh PMI readings especially from China & India. While the Fed is widely expected to announce a smaller 25 basis point rate hike, its guidance on future policy with its indication of rate cuts in 2023 is what will affect the market. India’s federal budget will be presented on the same day as the Fed decision. The budget’s impact on local equities and the bond yields will be an important aspect for the rupee.