Ahead of Today's Key US Payrolls Report, USD/INR Holds a Steady Undertone

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USD/INR opened the day almost unchanged from its previous day’s close. The currency pair is now trading around the 75 levels as the concerns over the Omicron variant is neutralized by the dollar inflows for overseas investments into Indian companies.

India’s trade deficit for November widened to USD 23.27 billion. In the first 8 months of the current fiscal, the trade deficit has widened to USD 128.98 billion, a whopping 171% rise over the previous year’s figure. The current account balance is widely expected to turn into a deficit at around 1% of GDP during 2021-22. The virus concerns and the higher current account gap may not allow the rupee to appreciate beyond the 74.50 level till the end of March 2022. Even if there is any recovery in the rupee exchange rate beyond the 74.50 level, such a rise shall remain unsustainable.

As compared with the exports in absolute terms in the earlier months from April 2021, the exports fell to USD 29.88 billion in November. Exports registered USD 262.46 billion in the April-November period and in the remaining four months of the current fiscal, the exports growth of USD 34.39 billion on an average basis is required to achieve the exports target of USD 400 billion in the current fiscal set by the Government.

The IMF has retained its GDP projections of India in the current fiscal at 9.5% and 8.5% growth for the next year retaining the status of one of the fastest-growing economies. The economic recovery continued around the globe, but at a slower pace.

Jerome Powell in his second day of testimony to Congress reiterated that Fed needs to be ready to respond to the possibility that inflation may not recede in the second half of next year. This raises the chance for a Fed rate hike in the fourth quarter of 2022, though many analysts are expecting two rate hikes from Fed in the second half of CY 2022.

10-year US Treasury yield is currently trading at 1.44% as investors were concerned over the emergence of a new coronavirus variant and its impact on global growth. In the US FOMC meeting scheduled on December 16-18, Fed will likely discuss a faster withdrawal of its massive bond-buying program. The spread between the 2-year and 10-year US yield has contracted to about 82 bps from about 110 bps a month ago. The spread contraction represents the higher possibility of rate hikes in the second half of CY 2022.

Based on fears the new variant will hit travel, the Brent Oil Futures futures dipped to a low of USD 68.14/barrel on 1-12-21 and currently trading a tad higher at 71.00/barrel. In view of the expected demand contraction in oil, it is quite possible the OPEC plus countries may withdraw the output increase of 400,000 barrels per day from January 2022 onwards in their effort to stabilize the oil prices.

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