Rupee gained on improving risk sentiments

The rupee spot rose for the second week in a row and saw the first monthly gain in eleven, breaking the longest losing streak in three decades, owing to broad dollar weakness and improving risk sentiments. India is among the fastest-growing Asian economies and it’s the growth story in play. Last week’s data showed that the Indian economy expanded by 6.3% in Q3, slightly higher than market expectations of 6.2% and extending the country’s growth momentum to eight straight quarters. Meanwhile, India’s Manufacturing PMI increased to a three-month high of 55.7 in November 2022 from 55.3 in the prior month, aided by a rise in new orders.  Foreign investor sentiments have been robust in November and December, with net FPI inflows of Rs.33,847 and Rs.7,723 crores respectively. India’s foreign exchange reserves rose for the third straight week and were up by $2.8 billion to $550.142 billion in the week ended 25th November, helped by a rise in foreign currency assets even as reserves held in gold shrunk. The recent rise in forex reserves can be mainly attributed to a sharp fall in the dollar index, leading to valuation gains in non-dollar reserves.

There has been a massive unwinding of dollar longs since the last few weeks, as Fed has indicated a slower pace of rate hikes from December, amid the backdrop of easing inflation in the US. In his recent comments, Jerome Powell cemented expectations of a 50 bps hike in December and failed to enthuse the bulls with hawkish comments. On the economic data front, US Factory activity shrank for 1st time since 2020 as the ISM Manufacturing PMI declined to 49 in November 2022 from 50.2 in October. Meanwhile, the PCE price index in the US, Fed’s preferred inflation gauge rose 6% YoY in October 2022, which is the lowest reading so far this year.  Even better than expected US Labour data for November couldn’t boost the dollar index.

Outlook for the week – The rupee spot (CMP:81.56) might trade in the range of 80.8 – 82.3 levels, with an appreciation bias:

The dollar index has fallen more than 9% from the September peak, while the Rupee spot fell merely 2% from the all-time highs touched recently. The rupee’s carry appeal has faded as interest-rate differentials with the US more than halved from a historical average. It will only get worse with the RBI widely expected to end a rate-hike cycle early next year, while the Federal Reserve is seen peaking only in the second quarter. During the December meeting, to be held on 7th December, RBI might go for a 35 bps hike and might pause after that.

Yuan climbed past the closely watched 7-per-dollar level for the first time since September, as authorities accelerated a shift toward reopening the economy and covid cases have also been in a downtrend for the last seven days.

The dollar index looks weak amid easing US inflation and optimistic news from China hurting haven bids. The greenback doesn’t perform during times of improving risk sentiments. Money markets are now pricing in 50 bps rate hikes in December followed by two 25 bps hikes and two rate cuts of the same magnitude in H2 2023. Eurozone GDP, US PPI, and inflation expectations will be the major events to watch out for, ahead of next week’s CPI data and FOMC meeting.

The rupee spot might appreciate for the week amid improving risk sentiments, an uptick in Asian currencies, and a weak dollar index. Any unexpected surge in oil prices poses a risk to the outlook.



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