Moderate drop in oil prices and gains in global stocks stabilize USD / INR

opened the day a little lower at 73.38 recording a loss of 13 paise / USD from the previous day’s close and the currency pair’s rise can be attributed to global equity gains and moderate declines in world oil prices. We expect the currency pair to trade in a range between 74.10 and 75.20 before the end of this month with a more pronounced bias.

In the first two days of the week we saw huge inflows of IPO dollars into the market leading the rupee to test a 6 week high of 73.8475 on Tuesday this week. Over a one month period, the rupee registered a low of 75.6675 on 12-10-21 and a high of 73.8475 on 9-11-21. For now, dollar inflows have retreated and the RBI’s intervention near 74.10 pushed the rupee down to a low of 74.59 on Thursday. Although dollar entries from the IPO pipeline and divestment entries at a later date could push the rupee higher to re-test the rigid resistance level of 74.00, we expect to see a repeat of the l RBI intervention near the above level to prevent the rupee from rising above the 74.00 mark on a sustainable basis.

Due to the moderately low rupee exchange rate, the dollar term premium for 3- and 6-month maturities has declined to 3.80% and 4.55% per annum respectively. Before the end of next week, we expect the duration of futures contracts up to 6 months to drop another 20 to 25 basis points, as interest received from exporters will induce such a drop in futures contracts. .

Until the end of December 2021, we expect the Rupee to trade in a range between 74.00 and 75.20 with a lower bias. Due to higher inflation in the United States, we expect to see a stronger dollar against major and Asian currencies, including the rupee. Instead of keeping debts or receivables as unhedged, it would be prudent to hedge exposures by choosing an appropriate spot level between the anticipated range suggested above. Barring unforeseen events and adverse external developments, we expect the rupee to close the current year at a level close to 76.00, recording a depreciation of less than 3.50% on an annualized basis against the conversion rate of 73.50 at 31-3-21.

The dollar was well supported as the annual inflation rate in the United States accelerated to a three-decade high of 6.2% in October, supported by a 30% rise in energy prices . The US dollar extended its gains for the third trading session and hit a high of 95.2670 today for the first time in 15 months. Due to the stronger dollar, emerging market currencies and the MSCI EM Currency Index posted their largest decline in 2 months.

US yields surged overnight on the back of the largest annual rise in US consumer prices in 31 years and a weak 30-year bond auction. The 2-year yield, which generally moves with interest rate expectations, saw its largest increase since March 2020. The 2-year yield peaked at 0.5340% after the announcement of ” a rise in inflation in October. The US 10-year yield also jumped to the current level of 1.57% after falling 1.4150% on 9-11-21.

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Felix J. Dixon

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