*The USD/INR uptrend to be maintained this year
*A 1% move in the exchange rate translates into a 15-basis point change in inflation
After the rupee has benefiting from steady foreign inflow and risk appetite play, appreciated against the US Dollar over 4.55% in the last 5 weeks from the peak this year, extending losses 65 paise four-day straight session, the rupee on Thursday fell at 73.14 ahead of the RBI meet. Weakness across US and Asian markets also added to the negative trend.
Since Feb 25, the currency rallied and 2% in May, the biggest monthly advance in more than two years, that turned it into Asia’s best performer in May.
A 1% move in the exchange rate translates into a 15-basis point change in headline inflation, according to the RBI study. Rising inflation concerns and Fed’s ultra-accommodative monetary policy have kept the US dollar under pressure. Hit hard by the Covid-19 crisis, India’s manufacturing sector observed the slowest rate of growth in 10 months.
The latest figures of India Manufacturing Purchasing Managers’ Index (PMI) moved down from 55.5 in April to 50.8 in May. Overall, the manufacturing activity has remained above 50, which indicates expansion, since July 2020. On the economic calendar, market participants are eyeing the Balance of Trade figures. According to the market consensus, the trade deficit is expected to widen from -$10.4 billion to -$15.09 billion.
Rupee may trade in the range of 72.50 to 73.50 in next couple of sessions. Broadly, we expect the USD/INR uptrend to be maintained this year, The Indian 10-year government bond yield was seen settling at 6.014 down 0.18%. Market participants are now eyeing Friday’s US unemployment data and the RBI interest rate decision which can provide more clues for the USD/INR exchange rate. India is a big importer of crude oil which hurts its current account balance as well as impacts the GDP negatively.
A cheap dollar means we will need to shell out lesser rupees to buy oil which is good news for us. This will help to check the rise in petrol / diesel prices at the fuel stations. Lower landed cost of commodities would also help reduce the inflationary pressures on the economy. This will help the RBI to maintain its accommodative stance and keep rates low fueling credit growth. The pressure of flight of money from Indian bourses to the US is reduced.
The basket of six major currencies US Dollar Index (DXY) is down 8% in the last one year and 4% from its 2021 peak. DXY was originally developed by the US Federal Reserve in 1973 to provide an external bilateral trade-weighted average value of the US dollar against global currencies. The six currencies that are used to calculate the index are Euro (57.6% weight), Japanese yen (13.6%), Pound Sterling (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%) and Swiss Franc (3.6%).
(Disclaimer: This analysis is only for educational purpose and is not and must not be construed as investment advice. It is analysis based purely on economic theory and empirical evidence. Readers are requested to kindly consider their own view first, before taking any position.) Date: 3-6-2021