It has been a roller coaster ride for the rupee for the last one month. We saw it test the 76.40 level against the greenback in mid-December and move closer to the
74 mark in January. It seems the RBI played a major role in getting the rupee stronger by using some of its reserves. It becomes evident from the way the reserves have depleted in the last few weeks, after hitting the high of
$642 billion to currently at $633 billion.
After almost three percent of appreciation in the last one month, it will be important to see which factors could start to play out in the market now.
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On the domestic front, market participants will continue to monitor
inflation readings and the stance the RBI adopts going forward. Most major central banks have been getting hawkish either by announcing trimming of bond purchases going forward or raising of rates, as the
Bank of England did in December 2021. The RBI too, in its last meeting, sounded a little less dovish, but the governor mentioned that support was warranted for a durable and self-sustaining recovery.
In the upcoming meeting, scheduled in the first week of February, we expect the RBI to provide some cues on when it looks to change its stance. Based on that, market participants are likely to gauge the timeline of a rate hike. This is likely to be positive for the rupee but global factors at this time don’t appear to be very rosy for the Asian basket. With rising US treasury yields, a stronger dollar, a surge in global crude prices and increasing number of COVID cases could disturb the overall market sentiment.
Increasing cases of the Omicron variant of COVID-19 have not only spooked us, with the government imposing some restrictions, but also other nations. These restrictions are leading to a major supply disruption of goods. This too is contributing to higher inflation, which is now haunting most major central banks.
Higher US Treasury yields suggest that the
Federal Reserve could look to raise rates sooner than anticipated and that could restrict a major downside for the dollar. The Federal Reserve’s easy monetary policy has kept the momentum low for the greenback but now that the US central bank is getting hawkish, and sooner or later in the year, it would look to make an announcement on how and when it plans to trim its balance sheet.
We expect the USD-INR pair to trade with a positive bias within the range of 73.50-76 in the quarter ending March 2022.
--Gaurang Somaiya is Forex & Bullion Analyst at Motilal Oswal Financial Services. The views expressed in this article are his own.
