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Major factors that will determine Rupee's move - 2nd October 2020

Major factors that will determine Rupee's move - 2nd October 2020

  • Date02 Oct 2020
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The overall trend of the US Dollar would be determined by US real rates. While nominal yields have remained stable despite huge supply of treasury securities (on account of the continuing purchases by the US Federal Reserve), the inflation expectations have been more volatile. US economic surprises' index has turned lower (which implies that economic data is missing consensus estimates), recovery in jobs market seems to be plateauing. A large number of people are still filing for jobless benefits. It is feared that in the absence of a second fiscal stimulus package, the spending power of the US consumer would get curtailed in Q4. This would derail the economic recovery which is currently underway. Therefore, in order to form a view on the global Dollar, it is important to track the developments around the second stimulus package closely. The Democrats and the Republicans are not able to agree on the scale and scope of the stimulus package. If the stimulus package indeed sees the light of the day, inflation expectations will rebound, causing the US Dollar to weaken. In the absence of a stimulus package, the inflation expectations would see a precipitous drop, causing the real rates to rise and that would cause the US Dollar to strengthen.

In the absence of a fiscal stimulus package, the US Fed may be compelled to look at other options available in its tool box to keep real rates low. These could include expanding asset purchases, initiating yield curve control or extending the maturity of the treasury securities it purchases.

USD/INR pair is likely to follow the broader Dollar. It is likely to remain a low Beta currency. High frequency domestic data seem to suggest domestic idiosyncratic factors are beginning to look up. Manufacturing PMI was the highest in several quarters. GST collection for September has been the highest so far this fiscal. Fuel and Energy consumption are close to pre COVID levels.

FDI related Inflows are likely to remain robust and cap up side. However, the RBI is likely to continue accumulating Reserves to prevent the Rupee from appreciating in relative terms and therefore a rapid move lower also seems unlikely. Forward USD purchases are likely to keep carry attractive and making shorting the Rupee expensive against the US Dollar.  From time to time the RBI may step off from bids to shake off complacency, prevent speculative build up and to let the Rupee align with the global trend. With a gradual pick up in economic activity, imports are likely to pick up. We may see more overseas fund raising on account of government borrowing crowding out private sector issuers. 

Overall therefore, if the global Dollar remains stable, volatility in Rupee is likely to remain subdued as opposing forces of increase in imports and RBI FX purchases are likely to be offset by inflows on the capital account front.

We expect the USD/INR pair to trade in a 72.30-75.50 range over the next 3 months.

 

The overall trend of the US Dollar would be determined by US real rates. While nominal yields have remained stable despite huge supply of treasury securities (on account of the continuing purchases by the US Federal Reserve), the inflation expectations have been more volatile. US economic surprises' index has turned lower (which implies that economic data is missing consensus estimates), recovery in jobs market seems to be plateauing. A large number of people are still filing for jobless benefits. It is feared that in the absence of a second fiscal stimulus package, the spending power of the US consumer would get curtailed in Q4. This would derail the economic recovery which is currently underway. Therefore, in order to form a view on the global Dollar, it is important to track the developments around the second stimulus package closely. The Democrats and the Republicans are not able to agree on the scale and scope of the stimulus package. If the stimulus package indeed sees the light of the day, inflation expectations will rebound, causing the US Dollar to weaken. In the absence of a stimulus package, the inflation expectations would see a precipitous drop, causing the real rates to rise and that would cause the US Dollar to strengthen.

In the absence of a fiscal stimulus package, the US Fed may be compelled to look at other options available in its tool box to keep real rates low. These could include expanding asset purchases, initiating yield curve control or extending the maturity of the treasury securities it purchases.

USD/INR pair is likely to follow the broader Dollar. It is likely to remain a low Beta currency. High frequency domestic data seem to suggest domestic idiosyncratic factors are beginning to look up. Manufacturing PMI was the highest in several quarters. GST collection for September has been the highest so far this fiscal. Fuel and Energy consumption are close to pre COVID levels.

FDI related Inflows are likely to remain robust and cap up side. However, the RBI is likely to continue accumulating Reserves to prevent the Rupee from appreciating in relative terms and therefore a rapid move lower also seems unlikely. Forward USD purchases are likely to keep carry attractive and making shorting the Rupee expensive against the US Dollar.  From time to time the RBI may step off from bids to shake off complacency, prevent speculative build up and to let the Rupee align with the global trend. With a gradual pick up in economic activity, imports are likely to pick up. We may see more overseas fund raising on account of government borrowing crowding out private sector issuers. 

Overall therefore, if the global Dollar remains stable, volatility in Rupee is likely to remain subdued as opposing forces of increase in imports and RBI FX purchases are likely to be offset by inflows on the capital account front.

We expect the USD/INR pair to trade in a 72.30-75.50 range over the next 3 months.

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