Recovery In Global Stocks And Weaker Dollar May Propel USD/INR To Test 73 Support

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After the USD/INR touched a high of 75.32 on 22-4-21, as a result of a spontaneous reaction to the second-wave of covid-19 and compared with the current level of 73.26, the currency pair registered a fall of 2.60% in the intervening period of less than a month. In the corresponding period, the portfolio equity inflows were about USD 1.40 billion and a depreciation in the currency pair was supported by the steep gains in the global stock markets and the dollar’s weakness against the majors and emerging market currencies.

Exports in April jumped to USD 30.63 billion while imports rose to USD 45.72 billion making the trade deficit widened to USD 15.09 billion against USD 6.76 billion in April 2020.  The trade gap was USD 13.9 billion in March. The trade balance report has no impact on the rupee. As the recovery in the country’s exports is broad-based and substantial, the Government expects the export target of USD 400 billion can be achieved in this fiscal.

India’s forex reserves rose by USD 1.444 billion to USD 589.465 billion in the week ended 7-5-21 quite close to an all-time high of USD 590.18 billion registered on January 2021. The increase in forex kitty in the reporting week was mainly on the back of a rise in the value of gold assets at USD 36.48 billion held by the Central Bank. The FCA in the reserve basket comprises mainly of US dollar besides euro, Pound and Yen. The forex reserves are sufficient to cover 18-month of imports. The reserve position of USD 590 billion which also includes the forward dollar purchase position of RBI estimated at USD 46 billion is quite large to prevent any sharp depreciation in the domestic currency arising in the event of any huge forex outflows or any other adverse events on the global front.

During the period from December 2020 till 14-5-21, the BSE Sensex registered a rise of 2.06% supported by the significant rally in global stocks and strong portfolio equity inflows. In the comparable period, the rupee showed a minimal depreciation of 0.30% against the US dollar. With the portfolio equity outflows expected to increase over a period of time, it is hard to see any appreciation in the domestic currency beyond the 73.00 level on a sustainable basis. With the rupee’s trading range almost established between the 73.00 to 73.80 level applicable in the next 1 month period, the prevailing forward dollar premia at elevated levels of 5.25% per annum or above upto six-month maturity provides a better opportunity for exporters to hedge their receivables and the importers may find the forward exchange rate as unfavourable for hedging their payables beyond the 1-month period. At this point in time, we strongly feel the long-term foreign currency loan liabilities may be kept unhedged. However, the instalment/ interest liabilities under the FCLs upto a 6-months period may be hedged to avoid the transaction and translation losses in the recommended period of the tenor.

The US dollar edged lower against major currencies since Friday after a report that US retail sales were unexpectedly stalled in April. The retail sales were unchanged in April after recovering a 10.7% surge in March, boosted by stimulus checks. Tepid data serves as a strong vote of confidence in the Fed’s low-interest-rate outlook and their dovish stance. The retail sales data bolstered arguments that the economic recovery was far from roaring and that rate hike may not come now. The 10-year US T-bond yield stands at 1.6250% now.

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