The sharp rise in oil prices led to a stress test at 75.50 in USD / INR

Opened the day a bit lower at 75.38 encouraged by fears of the Omicron variant and a sharp rise in local stocks. The currency pair broke through resistance at 75.50 and touched an intra-day low of 75.51 so far in the day. We expect RBI intervention to contain the currency pair’s rapid rise above the 75.50 level.

From the start of the current fiscal year to date, the rupee has depreciated by about 2.5% against the dollar and it is quite possible to expect a depreciation of almost 3 , 5% of the national currency at the end of the current financial year. Having recognized the divestment inflows in the first quarter of the current fiscal year, it is difficult to expect the rupee to depreciate beyond the 76.30-50 level by the end of March 2022.

The dollar is well supported by the expectation that the Federal Reserve accelerates the reduction of its bond buying program in response to the tightening labor market. Global stocks rallied as investors felt Omicron is not as deadly but more contagious and likely could not hamper the global recovery.

The Chinese central bank cut the repo rate by 50 basis points on Monday night, which bodes well for the recovery in consumption and metal stocks to recover as demand increases. China is in a mid-cycle slowdown and the falling repo rate is what the economy needs to get back on track. Chinese markets were supported by the easing of monetary policy from the central bank. peaked at 6.3486 today.

At the ninth consecutive policy meeting, the MPC kept all key rates unchanged and maintained its stance as accommodating. The MPC said the accommodative policy will continue until there is a lasting recovery in the economy. MPC noted that the 8.4% growth in the second quarter was largely due to the base effect. Retail price inflation in India fell to 4.48% in October, but it is still far from MPC’s ideal rate of 4%. Due to the unchanged monetary policy, the rupee broke through the strong support at 75.50, but exporters’ selling interest prevented the domestic currency from falling rapidly beyond the support level of 75.50. The 10-year sovereign bond yield has fallen slightly below 6.36% at this point.

As concerns persist, investors are turning to safe-haven assets such as the dollar and US Treasury bonds. This caused the dollar to rise and US bond yields to fall. The USD index is currently trading at 96.15. After a sense of risk aversion took hold in the markets, investors crowded into bonds in search of safety. However, the yield on 2-year bonds climbed to 0.68%, as Fed rate hikes appear certain in the second half of 2022.


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Felix J. Dixon