USD/INR opened the day a lot lower at 73.34 registering a downside gap of 20 paise/USD over its previous day’s close. Though the currency pair has developed a tendency to depreciate on the back of gains in the regional stocks based on day-to-day movements, the currency pair can be expected to test lower levels triggered by the calmer bond markets.
Yesterday the rupee touched an intra-day high of 73.18 and ended the day a lot lower at 73.54. Due to huge exporter-selling in near and medium-term receivables, the rupee has significantly gained. The downside rally in the rupee is linked to the sustained rise in US T-bond yields and the performance of the USD index against the major currencies. After the rupee was traded in the range between 73.77 to 73.18 on Monday, the domestic currency almost recovered more than 60% of its losses it suffered in the last 2 trading sessions. With the expected rise in US T-bond yields almost certain after a gap of time, the volatility in the domestic currency is set to increase.
After reckoning the various factors encouraging a pick-up in the global growth, we expect the emerging market currencies to trade lower with the possibility of portfolio outflows from the Asian emerging markets materialising at some point in time. Hence we are looking for a moderate downtrend in the rupee exchange rate with the range expected between 72.80 to 74.00 upto the end of March 2021. The exporters and importers are advised to hedge their forex exposures within the above range at the opportune time for the chosen tenor keeping in mind the elevated forward dollar premia upto 6-month maturities. Hedging near-term payables by importers and medium-term receivables by exporters seem to be the appropriate strategy to benefit from the exchange rate movements both on the spot and forward rupee. The dollar is currently trading at 91.22 holding most of its last week gains on the back of a huge sell-off in bond markets.
Global bonds have stabilized from last week’s sharp losses after central banks from Asia and Europe provided reassurance that policy support remains in place. This has helped to pull down the US Treasury yields back from their highest level in a year and put a floor under stocks.
After the huge portfolio equity inflows in January and in the first half of February poured into the market, the portfolio inflows have significantly reduced in the last fortnight as evidenced by the marginal accretion in forex reserves during the period. Fears that a rise in global bond yields would trigger outflows from the domestic stock and currency markets contributed to a further decline in the local unit.
Riding on the rupee’s firm trend from the beginning of November 2020, many of the importers have left their payables unhedged. The sudden fall in the rupee exchange rate has triggered the stop-loss positions to hit the market and importer-covering emanated in near-term forwards which pushed down the rupee to trade lower.
Asia extended the global rally in stocks today as a halt in the recent bond market sell-off eased investor's nerves and lifted riskier assets. Only Hang Seng and Nikkei 225 dipped by 1.13% and 0.78% respectively at this point of time. BSE Sensex and Nifty are currently trading a little higher at 0.70% and 0.75% respectively. The all-time high of 52,516.76 registered in the BSE Sensex seems to be the cap over the medium-term, though the stocks may try to gain to re-test the previous all-time high.