IPO-Related Dollar Inflows Could Limit The USD/INR Resistance At 75.00

Due to the dollar’s weakness and expected IPO-related inflows into the market, the USD/INR opened the day a lot lower at 74.4850 registering an overnight loss of 15 paise/USD. The currency pair is likely to find initial support at 74.30 and 74.10 thereafter before any rebound can be seen.

During the previous week, the BSE Sensex traded with the bearish note and the Sensex registered a loss of 0.56% in the period. Following the sharp recovery in the US, European and Asian stocks today, the BSE Sensex also tracked the trend and posted a gain of 0.56% at this point of time. Among the Asian stocks, Nikkei 225 posted a gain of 2.16%. Taiwan weighted index gained by 0.83% and KOSPI up by 1% at this point of time.

India’s forex reserves rose by USD 1.01 billion to record an all-time high of USD 610.01 billion in the week ended 2-7-21. The forex reserves have increased by USD 12 billion in the 5-week period from 28-5-21 to 2-7-21. The forex reserves are more than sufficient to cover 15-months of imports and provide the comfort to RBI to intervene in the market, in the event of any significant outflows arising out of Fed tapering and rise in US interest rates at a later date. The current forex reserves position is significantly higher than the external borrowings of the country.

Due to the slower economic recovery expected in the Asian region on account of the resurgence of covid-19 cases, investors flocked towards the safe-haven dollar and the yield on the 10-year T-bond fell to a low of 1.25% on 8-7-21, the lowest since the middle of February 2021. The 10-year yield has recovered to currently trade at 1.35%. The 10-year yield fell by 30 bps in less than 2-weeks timeframe. On Thursday last week, the 30-year US Treasury yield broke below 1.90% for the first time since February 2021.

The forward market has now returned to show normal conditions and trading at appropriate levels for maturities up to 12-month tenor, broadly representing the interest rate differential between the USD and INR for corresponding maturities.  RBI had earlier resorted to undertake sell and buy swaps with Banks to extend the maturities coming under the forward dollar purchase position of RBI.  From May 2021 onwards, the Central Bank halted the swap market operations with the banks which had resulted in normal conditions to prevail in the swap market. Currently, the 3-month to 12-month forward dollar premia are trading between 4.20% to 4.52% per annum respectively and the forward curve is demonstrating a steepening pattern at the medium and long end. With normal conditions ruling in the forward market, the importers and exporters can choose to hedge their payables and receivables at the appropriate spot level to derive a favorable forward exchange rate in settlement of import bill payments or crystallizing the exchange rate against export realization.