USD/INR pair remained higher amid a strong dollar

RBI keeps policy rates unchanged; raises inflation forecast, lowers growth outlook.

Key highlights

• Fed officials plan to shrink the balance sheet by $95 billion a month, meeting minutes indicate.
• India's services PMI rises to 53.6 in March; fastest expansion so far this year.
• Weekly jobless claims fell to 166,000 last week, the lowest level since 1968.

USD/INR weekly performance & outlook

The USDINR pair started the week with a flat bias at 75.77 levels. The pair remained volatile during the week and eventually closed the week at 75.90 levels. The USDINR pair remained higher amid a strong dollar. The dollar hovered near two-year highs against a basket of major currencies after meeting minutes showed the Federal Reserve is preparing to move aggressively to fight inflation, while commodity currencies fell from recent peaks. The pair is expected to trade with a neutral to bullish bias on the back of the global dollar strengthening as the hawkish Federal Reserve deals with the surging inflation. The gains in the pair are expected to remain capped due to the overall domestic dynamics. However, the Indian rupee is expected to remain sensitive to the development in the crude prices and FII flows. The FX market timing has been revised to 9 am-3:30 pm from 18th April onwards. The pair is expected to trade within the range of 75.40-76.50 in the week ahead.

Eurozone economy got March boost from reopening, prices soared

EUR/USD

The EUR/USD pair managed to trim part of the earlier drop to new multi-week lows, although it stays under intense downside pressure against the backdrop of geopolitical concerns and persevering USD buying. Indeed, geopolitics is back to the fore after the EU announced new sanctions against Russia, this time targeting coal and opening the door to potential sanctions against Russian oil and gas sectors. Also weighing on the risk complex appears the unabated advance in the US yields amidst a growing perception that the Fed could accelerate the pace of its normalization as well as the reduction of its balance sheet. The EURUSD pair is expected to trade with a neutral to bearish bias in the week ahead.

Inflation outlook worsens, steepest rise in global business costs since 2008.

GBP/USD

The GBP/USD pair is oscillating in a wider range over the last few trading sessions. The cable seems to extend losses after tumbling below the April 6 low at 1.3045 as the asset has struggled to surpass the round level resistance of 1.3100 decisively. The asset is driving lower after the release of hawkish Federal Open Market Committee minutes and elevating support for the neutral rates by the Federal Reserve policymakers on completion of the stated objective of helicopter money and ultra-loose monetary policy. Next week CPI numbers from the US and the UK will remain the key events to watch out for. The GBPUSD pair is expected to trade with a neutral to bearish bias in the week ahead.

Dollar index touches 100 for first time in nearly two years.

Dollar Index

The dollar index advances for the seventh consecutive session so far on the back of the persistent selling bias in the risk complex and the relentless march north in the US yields across the curve. Firm speculation of a more aggressive tightening by the Federal Reserve in the next months was once again reinforced by Federal Reserve’s rate-setters throughout the week, which in turn morphed into extra wings to US yields. So far, the near-term price action in the dollar continues to be dictated by geopolitics, while the case for a stronger dollar remains well propped up by the current elevated inflation narrative, a probable tighter rate path by the Federal Reserve, higher US yields, and the solid performance of the US economy. The dollar index is expected to trade with a neutral to bullish bias.

Domestic and global equities

Domestic equities:

Indian stocks have held up remarkably well despite rising in oil prices, possibly due to shifting in current account funding to foreign direct investment, allowing greater flexibility in domestic policy, cheaper oil sourcing, positive domestic politics reinforcing the government’s thrust on lifting corporate profits, structural domestic bid on equities, and growing positivity of multinational companies towards India. The Indian equity market index Nifty 50 traded in the range between 17640-18050 levels this week. The banking sector showed some initial gains with the news of the HDFC twin’s merger but the gains were wiped off later in the week. The FMCG segment showed some positive gains during the week. The energy was volatile over the week due to the global cues though gained more than 500 points to close the week.

Global equities:

The war has spurred a drive for energy security and created an energy supply shock that came on top of an existing one from the Covid-19 shock. The result was higher and more persistent inflation. The Federal Reserve is ready to normalize, and we see it delivering on its projection of large and rapid increases in rates this year. We expect it to then pause to evaluate the effects on growth. The Nasdaq has been averagely on the lower side while the Asian markets had mixed movements across the week primary reason is the new sanction on Russia as well the crude prices fluctuating with the US 10 year bill touching ceilings making investors move around funds for safe returns. European equity funds attracted heavy inflows as the Russia-Ukraine conflict whetted investor appetite for defense and energy stocks, while other regions posted outflows on concerns over unruly inflation.

Domestic and global bonds

Domestic bonds

\Weaker global cues led to some weakness in the domestic market during the week, as investor sentiment turned cautious after a more hawkish tone by the US Federal Reserve. Domestic Bond markets sold off post RBI policy. The bond yields rose about 10-20 basis points across the curve. The sell-off was most intense in the 5 yr-15 yr segment of the curve where the supply is extremely heavy. Apart from the hawkish shift by the RBI, what spooked the bond markets more was that the RBI did not give any roadmap on how it intended to ensure that the massive government borrowing goes through in a non-disruptive manner. The India 10-Year Bond Yield closed the last session of the week, on its multiple months high of 7.119%.

Global bonds

This year’s unprecedented global bond rout accelerated after Federal Reserve Governor Lael Brainard said the U.S. central bank will likely step up policy tightening by swiftly reducing its massive debt holdings. The prospect of aggressive Fed action drove the yield on benchmark 10-year Treasuries up to 2.70%, propelling it back into ranges seen in 2018 and 2019. Bonds worldwide are extending losses this week after completing an eight-month losing streak, the longest on record, according to the Bloomberg Global Aggregate index. Investors are dumping fixed-income securities as policymakers move to raise interest rates in the face of surging global inflation and tightening labor markets.

Monthly FPI net investments

The year ended March 2022 marked one of the worst-ever exoduses by Foreign Portfolio Investors from the domestic equity market. Foreign portfolio investors dumped Indian shares worth a record ₹1.4 lakh crore in the financial year 2021-22, mainly on account of a sharp surge in coronavirus cases, concerns over the risk to economic recovery, and global turmoil triggered by the Russia-Ukraine war. The figure compares with inflows of a whopping ₹2.7 lakh crore in the previous fiscal. FPIs have withdrawn net amounts in nine of the 12 months in the just concluded financial year. They have been selling domestic equities since October 2021. Moreover, flows from FPIs were expected to remain volatile in the near term given the headwinds in the form of elevated crude prices and inflation.

Macro-economic calendar