Indian Rupee spot notched a fresh all-time low of 81.95 in the previous week, amid broad dollar strength, surging US treasury yields and sell-off in risk assets on prospects of aggressive tightening from Fed. However, Rupee pared early losses after dollar index eased from a two decade high, on individual forex interventions from Japan, UK and China.

RBI raised its main repo rate by 50bps to 5.9% in its September meeting, in line with expectations, adding to the 190 bps in rate hikes by the central bank since the start of its tightening path in May. Equity markets fell more than 1% on a weekly basis, tracking global peers and fading FII momentum. FII’s have mostly been sellers in the previous week, and FPI net investments witnessed an outflow of Rs.3,955 crores from domestic securities in September after two months of inflows.

Delay in Indian bond inclusion in the global indices further weighed down on investor sentiments. India’s foreign exchange reserves fell to $537.52 billion in the week ended 23rd September, notching their steepest weekly fall in six months. Falling reserves particularly due to spot dollar sales and valuation effect provides only 8.5 months of import cover compared with 14 months of import cover in September 2021. Meanwhile, Reuters reported that India’s central bank is encouraging state-run refiners to reduce dollar buying in the spot market to contain a sharp fall in the rupee. The Reserve Bank of India has ensured that $9 billion has been made available at overseas branches of some Indian banks for the country’s three state-run refiners to tap.

Outlook for the week

Rupee spot  might trade in the range of 80.9 – 82.4 levels for the week, with a depreciation bias. The week is jam-packed with PMI’s from India, US, UK and Eurozone, which can make the markets volatile. However, the major focus for the week will be the OPEC+ meeting and more importantly US Non-farm Payrolls data. Easing FII sentiments, declining forex reserves, widening yield differentials with US and prospects of a looming recession might continue to add pressure on Rupee. Crude prices might rise on expectation of a larger output cut by OPEC+ in this week’s meeting, which might further weigh down on CAD, as India imports more than  80% of its oil needs. US Labour market is expected to slightly cool down in September, according to Bloomberg forecasts. Imbalance in Labour demand-supply has led to rise in wages, contributing to second round effects. In case of better than expected Labour data, markets might start pricing in aggressive rate hikes from Fed and we might see a rally in dollar index. Given the backdrop of sharp fall in domestic forex reserves and declining banking system liquidity, RBI might not aggressively intervene by spot dollar sales, might instead come up with measures to ease dollar demand.