USD/INR Upside Continue as Fed's Bond Tapering Program Looks Set to Get Underway

  • Forex Analysis
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USD/INR opened the day a tad lower at 73.78 registering an overnight loss of 9 paise/USD despite the US dollar index trading higher. The sharp rise in global stocks shall make the currency pair to trade lower in the coming week.

US FOMC kept the policy rates unchanged and the tone of their policy announcement was neither hawkish nor bearish. Fed announced that the taper will be gradual and the taper announcement could be as soon as November FOMC and it could end mid-2022. The US FOMC believes that negative factors like inflation and lower job growth should diminish and projected that the unemployment rate will continue to fall through the rest of 2021 and into 2022. Fed Chair Powell reiterated that policy will remain accommodative until they achieve maximum employment and price stability goals. While nothing was decided at the meeting, he indicated that a gradual tapering process that concludes around the middle of next year can be expected.

Taking clues from the Fed policy announcement, the global stocks rose sharply while the dollar index is now trading at 93.34 quite near to the 1-month high of  93.53 registered in the early hours of trading today. The 10-year US yield was dropped to 1.3020% from yesterday’s low of 1.2960%. The single currency touched a low of 1.1681 level today, the lowest since 20-8-21.

Dollar inflows continue to pour in on account of various bond issuances and portfolio inflows into debt. Also, a breakdown in China markets had led to a flurry of flows diverted to India. We expect a recovery in the rupee to 73.60 level in the coming week. The current level of 73.80 plus shall provide a good opportunity for exporters to sell their medium-term receivables.

To track the direction of the rupee in the near term, it is imperative to analyze the effects of Evergrande on global markets. Evergrande has about USD 90 billion in debt on its balance sheet and USD 300 billion as its unpaid dues with its interest liabilities rising by an average of USD 28 billion daily. A bailout with Government money may not be on the cards for Evergrande. A more likely outcome is debt restructuring. The stock has shed 84% so far this year, plunging below its 2009 IPO price of 3.5 Hong Kong dollars. While the local equities have not been affected, the impact on the rupee was moderate and the domestic currency tested an intra-day low of 73.9250 on Wednesday. The spillover of the Evergrande crisis may hurt India’s economic growth and hurt demand for commodities like steel, metals and chemicals. IMF believes that Beijing has the tools to prevent the situation from turning into a systemic crisis. As a result, Yuan fell against the dollar, weighing on other Asian currencies including the rupee.

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