Expected Inflows Into Indian Equities will Restrict the Huge Upside in USD/INR

  • Market Overview

USD/INR opened the day a lot higher at 74.63 registering a gain of 18 paise/USD over Tuesday’s close. The currency pair is now expected to test the 75.00 stiff support level due to continuous rise in global oil prices and US yields soaring higher to record fresh high in the last one year period.

After OPEC plus countries have decided on Monday to stick to their existing output plan, oil prices have surged. Brent crude prices touched a high of USD 83.13/barrel on Tuesday and currently trading at USD 83.04/barrel and the prices have already surged close to 60% in 2021 till date. Higher crude oil prices will increase the oil import bill and worsen the current account deficit which would weigh on the rupee.

The steep rise in US yields influenced the USD swap rates to rise. The 5-year USD swap rate is currently quoted at 1.09% and the swap spread between the 3-month USD Libor and 5-year USD fixed swap rate has risen significantly to 96 bps from about 65 bps a month ago. The widening of swap spread indicates there is more room for the US yields to rise in the background of Fed tapering timeline is nearing and interest rates expected to be raised atleast once in the latter half of 2022 and two rate hikes in 2023 as well to have the neutral rate set at about 1% per annum.

Government bond prices ended lower. The yield on the benchmark 10-year sovereign bond yield is currently quoted at 6.28% per annum. An uptick in global oil prices has sparked fears about a rise in domestic inflation, which factor pulled down the bond prices. A rise in US yields added to the pressure in domestic gilts. The indication from the Central Bank that they would be sticking to its budgeted borrowing amount for the fiscal however aided debt appetite. In the MPC meeting scheduled on October 6-8, the market expects the RBI to hike its reverse repo rate by 25 bps or more from the current 3.35% per annum. This may reduce the appetite for bonds and encourage an uptick in bond yields.

The MPC meeting of RBI may give a signal to the market that inflation fears in developed markets may soon impact the local market as well due to a sharp rise in global oil prices.

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