The rupee has come under pressure tahnks to
FII fund outflows and strength in the dollar overseas, following a good start to the month. T
he greenback rose against major peers after the Federal Reserve maintained a hawkish stance in its policy statement. FIIs have been on a selling spree for the last couple of weeks, taking out funds to the tune of $4.55 billion.
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Market participants remained cautious primarily ahead of two important events: the Union Budget and the FOMC policy. The Federal Chairman maintained a hawkish stance, as expected, and hinted at rake hikes as soon as the March meeting.
On the domestic front, the rupee was weighed down after the Finance Minister pegged the government’s fiscal deficit for FY23 at 6.4 percent of GDP, and revised the projection for 2021-22 from 6.8 percent to 6.9 percent. The focus will be on the RBI policy statement, due on February 10. The central bank could get a little dovish and hint towards a change in stance for future meetings. In the recent past, the RBI Governor has acknowledged that inflation is on the higher side. The central bank is preparing the market for the eventuality, and a hike in the reverse repo rate is just around the corner.
Globally, the dollar has strengthened after the FOMC policy statement and is expected to be influenced by economic numbers before the next meeting. In January, the dollar rose sharply, ahead of the FOMC policy review, putting pressure on the rupee.
Fed Chairman Jerome Powell suggested that the US central bank will push forward with interest rate hikes. It signaled it is likely to raise interest rates in March and reaffirmed plans to end its bond purchases that month before launching a significant reduction in asset holdings. He also warned that inflation remains above the Fed's long-run goal and supply chain issues may be more persistent than previously thought.
The dollar rose sharply against major peers after the announcement, and equities witnessed selling pressure at higher levels. Yields on longer-dated Treasury securities, sensitive to the Fed's balance sheet policy, rose as the Fed Chair signaled a decision would be made soon on when to shrink its portfolio of US government bonds and mortgage-backed securities.
This month, employment and preliminary GDP numbers from the US will be keenly watched. Minutes of the latest FOMC meeting will also be watched. Any hawkish comments from members could extend gains for the dollar.
The rupee is expeted to to trade within a range of 74.50-75.80 against the greenback in the near term.
--Gaurang Somaiya is Forex and Bullion Analyst at Motilal Oswal Financial Services. The views expressed in this article are his own.
