Lower USD Index and Huge IPO-Related Dollar Inflows Favour a Decline in USD/INR

USD/INR opened the week mostly unchanged from its previous day’s close, encouraged by a lower USD index and huge IPO-related dollar inflows into India. The fall in the short-term and long-term US bond yields also favored a gradual declining trend in the currency pair.

The huge dollar inflows expected to come into the market in August would support the rupee to maintain its firm bias within the 74.00 to 74.50 range in the near term. We do not expect the rupee to break its stiff resistance at 74.00 as the market expects strong RBI intervention if the above resistance level is breached on a sustainable basis. It is amply clear that RBI will not allow the rupee to appreciate to jeopardize export growth in the economy.

In the previous week, Asian stocks were trading significantly lower amid escalating coronavirus concerns. Also, the Asian stocks logged a volatile performance on continuing concerns over China’s regulatory crackdown. But the local stocks performed better with a marginal decline of 0.75% and 0.54% respectively in the BSE Sensex 30 and Nifty 50 in the corresponding period. Despite the portfolio equity outflows of about USD 1.75 billion in July 2021, the local stocks fared well supported by investments from DFIs, MFs, HNIs, and retail investors. The huge liquidity in the banking system is estimated at over Rs. 5,00,000 crore with lower money market yields helped to anchor a positive sentiment in local stocks.

US economic growth in the second quarter came in at 6.50% annualized weaker-than-expected while weekly jobless claims dropped by 24,000 to 400,000 last week. The lower-than-expected GDP growth in the second quarter took the steam out of a month-long rally in the dollar and the dollar index dipped to currently trading at 92.08 close to its lowest level since 28-6-21.

Asian stocks are trading mostly lower last week amid escalating coronavirus concerns. The surge in covid infections worldwide has been relentless, with spiking cases in the US and Japan so much that the world’s third-largest economy is set to expand the State of emergency at the end of last week to Osaka, Saitama, Chiba, and Kanagawa.

During July 2021, Hang Seng and PSEi Composite fell by 10.13% and 9.15% respectively. BSE Sensex is one of the best performers in the Asian region to register a rise of 0.2% followed by a 1.41% gain in the Jakarta exchange. Al the Asian currencies had depreciated against the dollar in July 2021. It is encouraging to note that the Indian rupee has marginally depreciated by 0.11% against the dollar.