FX weekly outlook

Major Developments

• India’s retail inflation surged to 6.30% in the month of May, over and above the Reserve Bank of India’s threshold of 6%.

• Federal Reserve officials held interest rates near zero but signalled they expect two increases by the end of 2023, pulling forward the date of lift-off as the economy recovers.

• India's forex reserves surged by $3.07 billion to reach a record high of $608.08 billion in the week ended on 11th June.

USDINR Weekly performance & Outlook

• The USDINR pair made a gap up opening at 73.20 because the Dollar has strengthened against all major currencies. The pair remained volatile during the eventful week and closed the week at 73.86 levels.

• India’s CPI inflation accelerated to a six-month high print of 6.30% in May, breaching the upper band of the RBI's flexible inflation target. Meanwhile, the WPI inflation soared to a record high of 12.94% in May, on rising prices of crude oil and manufactured goods.

• The Fed projected two interest rate hikes in 2023, earlier than previously expected. While the US central bank reiterated that the recent jump in inflation is transitory, it raised its forecast for headline personal consumption expenditures price index-based inflation to 3%, from 2% earlier.

• The rupee slumped against the US dollar because the greenback strengthened globally after the US Federal Reserve delivered a slightly hawkish stance on its monetary policy late on late Wednesday.

• The RBI minutes of the meeting showed that the economic disruption caused by the Covid-19 pandemic has brought growth concerns to the top of Indian monetary policy makers’ priority list, and relegated the inflation goal to a secondary position.

• The much anticipated Fed policy revealed that more US Fed members see rate hikes sooner given how the US economy is shaping up. Effectively, through its communication and optimistic growth and inflation projections, the Fed has delivered a twist.

• The RBI Governor stated that the emphasis should be to continue with an accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy while ensuring that inflation remains within the target going forward. The RBI, at least into the August review, will be inclined to look through the likely high inflation prints. The statements will be slightly hawkish, and flag risks to inflationary expectations. But they will likely signal to continue an accommodative stance as the growth recovery remains fragile.

• The Indian rupee is likely to trade with a neutral to upside bias on the back of the strengthening of the dollar. The focus will be on Existing Home Sales, PMI, New Home Sales, GDP, Core Durable Goods Orders, PCE Prices, Fed Chair Powell testimony, and Initial Jobless Claims from the U.S. The USDINR pair is likely to trade in a range of 73.65-74.70 in the coming week.

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