Markets Await the FOMC Policy Announcement to Decide on the Direction of USD/INR

The markets are awaiting the policy announcement after the FOMC meeting concludes on Wednesday. USD/INR opened the day a tad lower at 74.3650 registering an overnight loss of 5 paise/USD and the direction of the currency pair will be mostly determined by the Fed’s policy guidance. A moderate fall in the USD index may enable the rupee to test the 74.30 resistance today.

The dollar is now trading near multi-month highs against major currencies as investors look forward to the FOMC meeting today and Wednesday, for cues on tapering timeline and interest rate hikes. The rupee is trading flat as dollar-selling by exporters and overseas investment into Indian companies increased the dollar supplies into the market. In the event of any recovery in the rupee exchange rate beyond the 74.30 level on a sustainable basis, we can expect RBI to intervene and buy dollars from the market to maintain a slightly weaker rupee to boost export growth.

During the period from the beginning of January 2021 till date, all the US stock indexes posted whopping gains led by 17.46% in S&P 500, 15.12% in Nasdaq and 14.56% in DJIA. Euro Stoxx 50 registered a gain of 15.66%. Among the asian stocks, Taiwan Weighted index recorded significant gains of 18.75% followed by 13.9% in KOSPI. PSEi Composite and KLCI posted losses of 8.75% and 6.20% respectively in the corresponding period. BSE Sensex registered a gain of above 11% in the period.

Weakness in Chinese technology stocks saw the Hang Seng to trade lower which hurt sentiment. Followed by a sharp fall of 3.9% in Hang Seng on Monday, Hang Seng registered a fall of 1% at this point of time today. Chinese stocks listed in Hongkong have seen relentless selling following the downtrend in listed US ADRs. Also, traders were nervous as China reportedly was stepping up curbs on financing to local government financing vehicles to mitigate risks from hidden debt. Shanghai Composite Index is currently trading at 0.14% positive.

From FY 2015 to FY 2021, the average rupee depreciation was 2.96% per annum and this broadly represents the inflation differential between India and its major trading partners. The lower annualized rupee depreciation at 2.96% witnessed in the above period can be attributed to the inflow of huge current and capital account flows into the market to balance the dollar demand which led to a slower and gradual appreciation in the home currency from FY 2018 onwards. In the current financial year, we expect the rupee to depreciate by 4 to 4.50% on an annualized basis translating into a level of 76.45 to 76.80 at the end of the current fiscal. The market expectation of the rupee for end-March is also close to the above-mentioned levels.