By Gaurang Somaiya
The rupee consolidated in a narrow range after the RBI’s policy statement, wherein it held rates unchanged and maintained its policy stance of ‘withdrawal of accommodation’. The central bank maintained its policy rate and stance considering India’s strong economic growth and sticky inflation. Robust growth momentum means the MPC would be in no mood to cut rates sooner. In the last couple of sessions, the rupee fell near fresh lows as the dollar gained strength against its major crosses and also as geopolitical tensions in West Asia were on the rise. The latest data released on the domestic front showed inflation rose to 4.89% against an expectation of 4.9%. On the other hand, industrial production grew 5.7% in February as compared to growth of 3.8% in the previous month, suggesting that growth remains consistent in the manufacturing sector.
This week, apart from the WPI number, market participants will also be keeping an eye on the trade balance data and a widening deficit could keep the rupee weighed down against the US dollar. At the same time on the global front, retail sales and Fed members’ speeches will be important to watch. The dollar that has gained in the last few sessions could get a boost if retail sales numbers beat estimates and also if the Fed members continue to remain hawkish in their commentary. We expect USDINR (spot) to quote sideways with a positive bias and quote in a range of 83.10-83.80.
Global Currencies
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The dollar rose to the highest level since November’23 as Fed members continue to remain hawkish and also concerned that inflation in the US remains sticky. Safe haven buying was also seen in the dollar following rising geopolitical tensions in West Asia. The probability of a June rate cut decreased significantly, hinting at only two rate cuts this year. During the weekend, Iran launched explosive drones and missiles at Israel in retaliation for a suspected Israeli attack on its consulate in Syria on April 1, a first direct attack on Israeli territory that stoked fears of a wider regional conflict. Iran warned Israel and the US of a “much larger response” if there is any retaliation for its mass drone and missile attack on Israel. More updates will be awaited on the ongoing uncertainty in West Asia which is likely to trigger volatility on the dollar and precious metals pack. This week, from the US, retail sales numbers will be keenly watched and better-than-expected data could extend gains for the dollar. We expect the USDINR(Spot) to trade with a positive bias and quote in the range of 104.80 and 106.50.
Japanese Yen fell to the lowest level in 34 years primarily as the dollar strengthened against its major crosses and also as Bank of Japan trimmed rate cut expectations. Japan’s finance minister in his speech mentioned that authorities are not just analysing recent weakness in Yen but also factors that are driving the current move in the safe haven currency. He added that while a weak yen brings some benefits and drawbacks to the economy, it can hurt consumers by pushing up inflation. This month, from Japan, the BoJ policy statement will be important to watch but is likely to have less of an impact on the currency.
(Gaurang Somaiya is a Forex & Bullion Analyst with Motilal Oswal Financial Services. Views expressed are the author’s own. Please consult your financial advisor before investing.)