USD-INR: cross currencies | Decoupling of forex and equities markets, rare but not impossible!

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The USD-INR parity has moved little over the past week despite the volatility of the Dollar index; after opening at 73.60, the pair traded between 73.35 and 73.74 before ending the week at 73.48. The DXY was up 0.63% in a week dominated by US economic data. Consumer prices in the United States in August rose 5.3% year-on-year, the slowest pace of increase in six months, leading market participants to lower their bets on an announcement of anticipated Fed cut at next week’s FOMC meeting.

However, it didn’t take long for the feelings to change; Retail sales were surprisingly up 0.7 percent month-on-month in August, in contrast to an expected 0.8 percent drop and the expectation of an early cut has risen again. It should be noted that the impending cut in the FOMC’s quantitative easing program is bad for all emerging market economies, including India, as it will lead to an immediate reduction in liquidity which will ultimately be followed by a rate hike. interest, although the US central bank has indicated that a tap may not be followed by immediate monetary tightening.

Domestically, WPI inflation jumped but the CPI was moderately below 5.3 percent in August from 5.6 percent in July. Meanwhile, the Indian government has carried out several structural reforms by approving the Production Linked Incentive Program (PLI) for the automotive and drone industries, which offers an incentive of Rs 26,058 crore over five years. and decided to allow 100% FDI in telecommunications. via the automatic route of the previous 49 percent. In addition to this, the creation of a bad bank also helped the banking sector, and thus contributed to the gains of Indian stocks. Although the initiatives take some time to make real money, it is the sentimental boost that will keep optimism about Indian growth and keep investors interested.

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As the chart above shows, the broader gains in equities have not been able to push the Indian rupee higher. Nifty has clearly outperformed, increasing nearly 13% from June 1, 2021 to date. Contrary to this, the rupee depreciated by 0.80%. During the same period, most Asian markets weakened and the rise, if any, was limited. Interestingly, compared to most of its Asian peers, which have moved in tandem with the respective stock market, the Indian rupee is the only currency that has depreciated despite the rapid rise in the stock market.

REIT’s investments during the period under review were approximately $ 5.5 billion, of which approximately $ 2.7 billion was in stocks. Despite massive inflows of dollars, the rupee was unable to strengthen; this was probably due to the intervention of the RBI to manage volatility in the currency market. The $ 35 billion increase in the RBI’s foreign exchange reserves over the period somewhat confirmed the fact that the central bank was bidding for US dollars at every low in the USD-INR pair, and rightly so. , because RBI would like to build its war chest. to deal with sudden movements, which tend to occur when global budget support is withdrawn and associated liquidity is gradually unwound.

Considering the above factors, over the coming week we would expect the USD-INR to move between 73.00 and 74.20 with price action in both directions. Volatility is also expected to rise as the long-awaited two-day FOMC meeting falls during the week.

(Ritesh Bhansali and Imran Kazi are both vice presidents at Mecklai Financial. The opinions are theirs)


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