The rupee spot strengthened sharply in the previous week, aided by renewed FII inflows, broad risk-on sentiments, and a sharp rally in Indian equities. Markets were expecting a Fed pivot and speculation on China planning to ease the zero covid policy improved the risk sentiments.  Even though RBI scheduled an emergency meeting on 3rd November, no primary outcome was expected, mainly to address the GoI, on the central bank’s failure to contain the inflation. The latest data showed retail prices rose by 7.4% annually, marking the ninth consecutive month when inflation surpassed the central bank’s upper target. On the economic data front, both the Manufacturing and Services PMI were surprised on the upside, providing some respite for Rupee. India’s Manufacturing PMI came in at 55.3 in October. After falling for two consecutive quarters, India’s foreign exchange reserves surged by $6.56 billion, the biggest weekly gain in more than one year, to $531.08 billion in the week ended 28th October.

The dollar index fell towards 110 levels, down by 0.62%, against the previous week’s close of 110.76. In the November meeting, the Fed raised the target range for the federal funds rate by 75bps to 3.75%-4%. It marks a sixth consecutive rate hike and the fourth straight three-quarter point increase, pushing borrowing costs to a new high since 2008. Powell sounded hawkish during the press conference and indicated that the fed funds terminal rate might be higher than the September SEP. However, the greenback fell sharply post the much-awaited US Labour data released last Friday, though it pointed to robust strength in the Jobs market. The US economy added 261K jobs in October 2022, while, the unemployment rate edged lower to 3.7%. Reports on China moving towards easing the zero covid policy also improved the risk sentiments, hurting the dollar.

Outlook for the week: US CPI in focus

Rupee spot (CMP:82.30) might trade in the range of 81.75 – 82.85 levels for the week:

The major event for the week is US CPI data. US CPI data for October is expected to come at 7.9% against 8.2% in September. The decline is mainly due to a lower base. However, the CPI is expected to rise 0.6% month on month. In case of stronger CPI data, we might see a rally in US treasury yields on rising expectations for a 75 bps rate hike in December, amid the backdrop of a robust Labour market.

In case CPI surprises on the downside, we might see further easing in the dollar index. However, the downside might be limited, owing to haven buying amid no ease in China’s zero covid policy, the slowdown in the Eurozone economy, and higher rates in the US for a longer period.

For USDINR, the bias remains toward the upside, and we recommend buy on dips strategy. Broad fundamentals for the Rupee remain bearish amid the backdrop of weak macro factors such as an elevated dollar, rising treasury yields in the US, higher commodity prices, and a looming global slowdown. Having said that, extreme volatility is expected for the week, as the major focus will be on the US inflation data.