Recovery In Local Stocks Induced Continuing Weakness In USD/INR

USD/INR opened the day a lot lower at 72.3550 registering an overnight loss of 15 paise/USD. The modest recovery in global stocks triggered a down move in the currency pair despite the sharp rise in US bond yields across the curve.

During the CY 2020, RBI purchased USD 126 billion from the currency market or about 4% of its GDP to offset the huge inflows. Having achieved reasonable stability in the rupee exchange rate during the phase of huge portfolio equity inflows hitting the market, we believe the Central bank may continue with its intervention to hold the rupee around the 72.50 level and any intermediate rise beyond the 72.50 level as we are witnessing now may prove to be unsustainable and can be viewed as a temporary reaction to test the rupee’s upside. RBI has calibrated the appreciation in the rupee in a phased manner and their intervention strategy is likely to continue till the reversal in the current trend is seen at some point in time in the future.

India’s October-December economic growth figures are being released on Friday this week and the data is expected to show a 0.5% expansion Y-O-Y in the above period. The impetus for more gains could come on Friday if the economic growth figures were on expected lines.

Tracking sporadic weakness in the dollar index, the rupee continues to trade higher. Investor risk appetite has increased due to optimism that global economic growth is poised for a swift recovery. The dollar continues to trade lower as investors are expecting cautious comments from Fed Chair. The dollar index traded 89.94 in the early Asian session and now trading flat at 90.01 level. Euro gained to 1.2175 level and as compared with other currencies the euro’s gains were modest as investors worried about the Central Bank’s sensitivity to the strong currency. The pound gained to 1.4084 to 3-year highs. Asian currencies are trading mixed today despite the dollar fell to more than 1-month low. Most of the Asian stocks are trading higher today led by a gain of 1.52%in Hang Seng and 1.5% in the Thai Set Index at this point of time.

The sentiment in the local bond market took a hit early last week after RBI announced a twist operation by simultaneous purchase and sale of securities for an aggregate amount of Rs.10,000 crores each on February 25, which dashed the hopes of an outright bond purchase through OMOs. This has led to a surge in the 10-year bond yield to 6.2050% on Monday, the highest since late-August and during the period from 1-2-21 to 22-2-21, the 10-year bond yield registered a rise of 31 bps. The rise in crude oil prices and a surge in US 10-year T-bond yield added pressure to the 10-year sovereign bond yield. Concern about the excessive supply of bonds dented the investor sentiment. Most of the 2030 bond maturities devolved from the PDs. The 10-year sovereign bond yield is currently trading lower at 6.16%, a sign of recovery from the huge rise in bond yields.