opened the day a tad higher at 73.23 due to a retreat in the
US dollar index
to the current level of 92.66 from the 14-month high of 93.47 registered on 31-3-21. Due to the imposition of partial lockdown by the Maharashtra Government and the upsurge in covid cases in India, the currency pair is on an uptrend against the dollar. The cases of the covid surge are increasing in India making the country as a hotspot to the coronavirus quite close to the covid cases registered in the US and Brazil.
The spike in covid-19 cases in India dampened the market sentiment and we expect the rupee to move gradually lower to test the 74.00 level before the end of April 2021. Added to the grim covid situation in Maharashtra, the spike in covid cases in Kerala, Karnataka, Punjab, Madhya Pradesh, Tamil Nadu (NS: TNNP ) and Delhi remains a cause of concern. Due to the rise in covid cases, the emerging market fundamentals may weaken which could trigger higher investments into US Treasuries.
We expect the rupee to hold the 73.00 resistance for a calibrated down to move to the 74.00 level before the end of this month. The decline in the rupee will be gradual in relation to the dollar’s uptick against the emerging market currencies and the performance of domestic stocks over the comparable period.
Even though the forex reserves fell by USD 2.986 billion to USD 579.285 billion for the week ended 26-3-21, India’s forex reserves(including gold reserves) were the fourth highest in the globe after China, Japan and Switzerland. The current forex reserves of the country can cover more than a year’s import payments. India’s forex reserves would be more than sufficient to face any adverse situation in the overseas markets arising out of foreign fund outflows. Due to any possible slowdown in the FDI and portfolio inflows in the current financial year, the current forex reserves would be sufficient to hold the rupee from any sharp depreciation beyond the 75.00 level on a worst-case scenario at this point of time.
With the domestic retail inflation expected to be above 5%, RBI shall keep the policy rates unchanged. The inflation differential between India and the developed countries could keep the rupee under pressure over the short term.
The local stock market reacted to the news of partial lockdown in the financial capital of the country and the BSE Sensex and Nifty 50 registered a fall of 1.74% and 1.54% respectively on Monday. Today the local stocks are trading marginally higher but the overall trend is on the downside. The expectation of the market participants suggests that the all-time high of 52,516.76 in the BSE Sensex registered on 16-2-21 could prove to be the peak in the ongoing bull rally which had started from the beginning of May 2020.
The forwards fell sharply lower across the maturities. The 3-month and 6-month forward dollar premia is currently trading at 4.80% and 4.87% per annum respectively. The paying pressure in the swap market has subsided which led to a downside adjustment in forwards. The forward market differential between the 1-month and 12-month maturity has significantly contracted to 0.25% per annum from the high of 1.80% per annum seen in the last week of March 2021. The forward curve is looking flattish and over a period of time, we expect the curve to marginally steepens at the medium and long end.
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