The FOMC minutes confirmed Fed's commitment to keeping policy accommodative until it sees sustainable, significant progress towards its inflation and employment objectives. US yields have retreated across the curve with 10y now at 1.66% and 2y at 0.15%. The Dollar has strengthened overnight against majors and EM currencies. The dovish FOMC minutes helped US equities hold on to record highs.   

The Rupee depreciated the most in two years yesterday, ending at 74.56 in OTC. The RBI in its monetary policy unanimously left key rates unchanged but introduced a GSec Secondary market acquisition program (G-SAP) under which it would buy Rs 100000crs of Government bonds. These purchases would be beyond the OMOs that it would conduct. The RBI also extended the amount and tenor of it's VRRR (i.e. Variable Reverse Repo Rate) facility through which it would give suck out some of the excess liquidity from the banking system. While VRRR could cause the money market rates to move higher, G-SAP would cap long-term yields. The overall impact could be that we could have a flatter term structure.

While the bonds and equities rejoiced RBI's move of capping long term yields, the Rupee had to bear the brunt as the move would reduce the carry. FPIs who had been receiving carry in offshore unwound their positions causing the Rupee to weaken. Stop losses also got triggered along the way causing the spike to become even more vicious.

1y forward yield is now down to 4.75%. The Rupee could remain under pressure if carry falls further. 74.90 is a key resistance on the upside.  It will be interesting to see if the RBI intervenes to curb volatility by supplying dollars.  Asian currencies are trading weaker against the USD. 

Strategy: Exporters are advised to cover a part of their near-term exposure on upticks towards 74.50. Importers are advised to cover through forwards on dips towards 73.50. The 3M range for USDINR is 72.50 – 74.40 and the 6M range is 73.00– 76.00

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