USD/INR Steadied As Inflation Fears Triggered Decline In Global Stocks

After a decline in the USD/INR in the last one week period, the currency pair opened the day a tad firmer at 73.49 registering a gain of 14 paise/USD over its Monday’s close. Following the decline in US stocks, most of the Asian stocks posted significant losses on fears of accelerating inflation as traders lost confidence in the risk-on rally. Taiwanese Weighted Index fell by 3.36% followed by Nikkei 225 and Hang Seng registering a fall of 3.24% and 2.29% respectively at this point of time.  Asian currencies also fell against the dollar and the USD/INR is also registering a moderate recovery today.

Jitters about India’s economic growth due to spiralling cases of covid-19 in India and extension of lockdown across States may possibly limit the rupee’s gains beyond the 73.00 level for sure. India’s GDP growth for 2018 was 6.12% which declined to 4.18% in 2019. Compared to a growth rate of 4.2% in 2019-20, the real GDP is estimated to contract by about 8% in FY 2021 for the first time after 1979-80. For the current financial year, the earlier GDP growth estimate was in the 11 to 12% range. But due to the impact of the second wave of the virus on the economy, the GDP growth in FY 2022 is expected to be in the single-digit at 9 to 9.5% as per the forecast from various agencies. The aggregate/ combined GDP growth in the FY 2021 and FY 2022 is currently estimated at not more than 1.5% to 2%.

Covid-19 updates and the country’s macroeconomic data shall guide the stock market trends over the short term. The higher covid cases of about 375,000 cases on an average in the last 10 days time period is surely a headwind in front of the overall economy and business development. Following the decline in global stocks, the benchmark BSE Sensex and Nifty 50 are currently trading lower at 0.75% and 0.65% respectively and we expect the local stocks to end the day significantly lower from the current levels.

Chinese Yuan rose to 6.4265, its highest since 15-6-2018 and recovered all its losses booked this year. Taiwanese dollar is an exception and it is currently trading at 27.86 just a shade below the 24-year high.

The global oil prices are rising with Brent crude currently trading at USD 67.85/barrel. The rise in oil prices could be tied to anticipation of an increase in demand from Europe. Brent crude prices have risen by about 2% last week. Due to the rise in global crude prices, the diesel price has risen close to 89/litre. Petrol prices in some parts of the country have risen above 100/litre. As the rupee has gained against the dollar in recent weeks, the petrol prices which are also linked to the USD/INR exchange rate has provided some support to moderate the price rise. The rise in diesel prices would increase transportation costs and impact the price increases in essential and non-essential goods. The resultant rise in imported inflation may lead to a spike in headline retail inflation numbers.

Due to the dollar glut in the onshore market, the forwards are ruling much higher across the tenor. We observed the disconnect between the money market interest rates and forward dollar premia for various tenors upto 6 months. As the rupee exchange rate is ruling firm despite the adverse internal factors, many of the importers prefer to keep their payables unhedged to save on the hedging cost. We advise the importers to hedge their payables upto end-June maturities with an average forward exchange rate of 74.00 or so. Based on the sell and buy dollar swaps to be undertaken by RBI with Banks out of their outstanding forward dollar purchase position on a periodical basis, it looks certain the forwards upto 6-month tenor would be ruling higher than 5% per annum over the short-term. Hence the exporters can target a spot exchange rate of 73.80 or better to sell their month-wise export receivables upto 3-month maturities and gradually increase the hedges upto 6-month maturity brackets in relation to the expected weakness in the rupee exchange rate over a period of time.