usdinr: Super hawkish Fed may drive USDINR higher; RBI may go for 50-bps rate


An eventful week comes to an end. Last Thursday, USDINR clocked the single biggest one-day appreciation since February 24, when Russia invaded Ukraine.

USDINR has crossed above 81 in the spot market, a fresh all-time high. The up move in the USDINR pair was basically a result of a couple of things — a) the escalation in the geopolitical instability after Putin’s speech and b) the US FED opting for a very hawkish 75-bps hike.

The US Fed has hinted at raising rates by another 125 bps by December of this year and another 25 bps before mid-2023. If they do as they forecast, then the fed rate could be near 4.75% before mid-2023, the highest level since the global financial crises of 2007-08.

Higher US rates mean money flows from the rest of the world into the US Dollar. That in turn drives the USD higher against other currencies, including the rupee.

Having said that, the rupee remains an outperformer when compared against a basket of currencies from the emerging market space (EMs) and developed market space.

This has been possible due to low oil prices, FPI inflows and RBI interventions.

Currency TYDET CONTRIBUTORS



Over the next couple of weeks how far USDINR moves up will be dictated by two factors:

(i) where RBI draws a hard cap via aggressive intervention

(ii) how far the US dollar index can travel. RBI had been largely absent between 80 and 81, and may step in to check volatility

In our opinion, RBI looks to keep the rupee stable and also a median to slight outperformer amongst its peers. It has ample levels of foreign exchange reserves to ensure stability. It can always use the forward book to add to the quantum of intervention.

The upcoming RBI policy meeting, on 30 September, is a key event for the currency and bond markets. Traders will be watching if RBI comments on rupee volatility.

Additionally, the focus will also be on how far RBI raises rates based on the rupee’s weakness. A larger than expected 50-bps hike could help the rupee and ensure stability.

Apart from the RBI policy meeting, the US dollar index will impact USDINR. US dollar index may be driven by trends in US bond yields and the upcoming US economic data like durable goods orders and inflation measures like PCE.

Rupee spotET CONTRIBUTORS



USDINR remains in an uptrend as the bullish channel is intact. Major resistance can be expected near 81.50/75 region in the spot market. Major support is between 79.80/80. The bias remains upward.

(The author is VP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities Ltd.)



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