Global risk sentiment continues to remain upbeat with Dow, S&P and NASDAQ hitting new record highs. Record low real rates across the globe is causing the huge amounts of liquidity infused by central banks to chase riskier assets. 

Safe haven assets such as the US treasuries, DXY and the Yen are underperforming. Fed chair Powell in his testimony to the Senate Banking Committee said the US economy continues to remain in a 'damaged and uncertain state' despite progress on the vaccine front. Reluctance to read anything at all into the recent recovery suggests that the Fed is likely to remain in ultra dovish mode for the foreseeable future.  

On the domestic front, Cash USD inflows related to MSCI index rebalancing  along with aggressive selling by foreign custodian banks caused the Rupee to strengthen. 

Nationalized banks who had been supporting USDINR were missing in action for most part of the session, causing a brisk move lower to 73.44. Nationalized banks stepped in towards the end of session to get USDINR to close at 73.66. We may see outflows related to MSCI index rebalancing today. The reaction function of the central bank will be interesting to see. We expect the Rupee to trade between 73.35-73.70 range. 

Strategy: Exporters are advised to build long term exposure in 74.60-75.50 range. Importers are advised to cover through options. The 3M range for USDINR is 73.00 – 75.40 and the 6M range is 73.00 – 76.00.

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