Influenced by a steep rise in US yields and a fall in global stocks, the USD/INR opened the day a lot higher at 73.65 registering an overnight gain of 33 paise/USD. The currency pair in the early hours of trading today registered a high of 73.79, the highest level since 7-5-21. We expect the currency pair to retreat below the 73.50 level in the coming week.
As prospects dimmed of additional supply from Iran hitting the market in the near future, crude oil prices soared hitting the highest levels in more than 2 years. Brent crude registered a high of USD 74.74/barrel on Wednesday highest since October 2018. Vaccination programs allowed many western countries to lift their covid-19 restrictions which had resulted in demand recovery and crude markets posted gains of over 40% in 2021. The rise in the prices of brent crude underpinned expectations that the pace of demand recovery for the commodity will increase in the second half of the year.
Exports in May were at USD 32.27 billion and imports at USD 38.55 billion and the trade deficit stood at USD 6.28 billion. The trade deficit for May 2021 was much lower as compared with the deficit of USD 15.10 billion in April 2021. Export outlook has been projected to be positive in the current fiscal due to the gradual opening up of major global markets and the improvement of the situation in the country. The steady April and May 2021 export numbers suggest that India will be well poised to benefit from recovering demand in the US and Europe.
Fed held the policy rate unchanged at 0 to 0.25% where it had been since March 2020. Fed also suggested that they will continue with the USD 120 billion bond purchase program every month till substantial progress is seen on employment and inflation.
Fed signalled an earlier interest rate rise by as many as two rate hikes by the end of 2023 compared with the majority looking for rates to remain unchanged till 2024. The dramatic shift in expectations was motivated by stronger-than-expected growth and inflation. This has resulted in a sharp rise in the US dollar against major currencies, a fall in global stocks and led to a steep rise in 10-year bond yield to 1.58% as of now, registering a rise of 15 bps in less than a week. Whether the US Dollar Index Futures post FOMC gains are sustainable or not will be made known in a couple of days from now when the market views the developments due to a sudden hawkish turn at Fed.
All the global stocks fell and the BSE Sensex and Nifty 50 are trading at 0.21% and 0.27% negative at this point in time. The fall in local stocks is lower as compared with the fall of 1.10% in Nikkei 225 and 0.4% drop in KOSPI. We strongly feel the decline in global stocks is a temporary phenomenon and expected to recover most of its losses from the beginning of next week.