Samarth Mercantile

*Rupee weakness vs dollar to persist as market expectations of a Fed rate hike

*Finance Ministry positives comments were the major ones to weigh on the Rupee

While keeping the grown and inflation forecasts for 2022 intact, RBI Governor Shaktikanta Das said that prospects of economic activity steadily improving. Stance accommodative if necessary to revive growth on a durable basis, he said. The RBI kept the benchmark interest rate (Repo) and Reverse Repo rate unchanged at 4.0% and 3.35% respectively, matching market consensus. Additionally, the RBI also kept Marginal Standing Facility (MSF) and Bank Rate unchanged.

The Indian rupee has been choppy against the US dollar in the recent past. However, it has been decreased in the last six months on the overall. The local unit soon pared its initial gains and touched a low of 75.68 against the US dollar on Thursday. India reports lowest daily infections since May 2020, total active cases dropped to June 2020 levels. It’s worth noting that the Indian policymakers are bracing for the listing of the domestic bonds to the global indices and the same keeps the investors at home hopeful enough to favor Rupee.

Now question is should Rupee bulls keep reins past 75.75, April 2020 peak near 77 will gain the market’s attention ahead of the theoretical target surrounding 78. Economists at Société Générale expect the pair to trade within a 75-77 range over 2022. In the medium-term, we expect the trend weakness vs the dollar to persist, as market expectations of a Fed rate hike increasingly gain momentum.

Among the positives, comments from Indian Finance Ministry official cited, were the major ones to weigh on the USD/INR prices. Economy has seen V-shaped recovery, key parameters showing strong rebound. Also weighing on the USD/INR prices is the Developments in China also contributed to the risk-on tone, as the People's Bank of China (PBOC) said it would lower the amount of cash that banks must hold in reserve.

The 6 Currency dollar index was steady and riskier currencies have also found buyers, as traders bet that the Omicron variant of COVID-19 would not be as severe as previously expected. oil prices climbed as risk appetite improved following reports in South Africa earlier in the week saying that Omicron cases there had only shown mild symptoms. Now it does not look like there's a great degree of severity so far. Support also seemed to return to cryptocurrencies after a wild weekend sell-off, and bitcoin steadied at $51,230.

An absence of the Fed rate hike chatters, mainly due to the silent period before the next week’s Federal Open Market Committee (FOMC) and Friday’s US Consumer Price Index (CPI). On the other hand, receding fears of the South African coronavirus variant, dubbed as Omicron, join policymakers’ readiness to safeguard respective economies of China and Japan to favor risk appetite.

(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: 10-12-2021

Riddhi Siddhi Bullions Ltd

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