Sharp rate hike more likely as Re in freefall

Forex Volatility

- USD-INR pair breached 80/$ mark

- Support level at 79.55

- The pair may test 80.30-80.55 levels

- RSI is above 70 level

- MACD is also showing positive divergence

The USD-INR pair is on a strong wicket, with such a positive USD backdrop. A strong US Dollar Index, high US bond yields with a deeply inverted yield curve and weak equity markets all makes it challenging for FPI and carry trade flows into emerging markets (EMs)

Mumbai: Thanks to historic weakening of rupee which has already breached the level of 80 against the greenback, the Reserve Bank of India (RBI) may go for a sharp rate hike next month. It may happen due to RBI's concerted bid to control rupee's fall. After already having breached the 80/$ mark, the USD/INR pair is likely to hold to its support level of 79.55 on a closing basis and may test 80.30-80.55 levels.

In fact, the rupee is headed for a bumpy ride after US Federal Reserve chair Jerome Powell on Friday pledged to fight against record high inflation with sharper rate hikes.

Talking to Bizz Buzz, Rahul Kalantri, vice president (commodities), Mehta Equities, says: "We expect that the pair could hold to its support level of 79.55 on a closing basis and may test 80.30-80.55 levels."

Futures contract traded steady last week. On the weekly technical chart, the pair is sustaining above its resistance level of 79.55. Relative strength index (RSI) is hovering above 70 levels and Moving Average Convergence Divergence (MACD) is also showing positive divergence on the weekly technical chart.

As per the weekly technical chart, we observed that the pair crossed its resistance level of 79.55 and sustained above these levels. Looking at the technical set-up, the pair consolidated in the range of 79.55-80.05 and is ready for the upside breakout, he said.

The pair is on a strong wicket, with such a positive USD backdrop. A strong US Dollar Index, high US bond yields with a deeply inverted yield curve and weak equity markets all makes it challenging for FPI and carry trade flows into emerging markets. However, the speed of the upmove will be closely regulated by RBI. RBI has twin objectives of not letting the rupee become a weak outlier and also, it doesn't want the USD-INR to become too volatile. This means it may continue to sell USD as the spot and forwards move to a fresh all-time high.

Anindya Banerjee, VP, Currency Derivatives & Interest Rate Derivatives, Kotak Securities, said, "However, this may not alter the trajectory of the pair and the path of least resistance would remain upward. We expect a range of 79.70 and 80.50 over the next 1-2 weeks."

However, the important thing is that equity and currency markets in India though having reacted adversely, were quick to recoup some of the losses in subsequent trades, with portfolio inflows turning positive even though marginal at $30 million on August 29.

Soumya Kanti Ghosh, SBI group's chief economic advisor, says: "The overall portfolio inflows since July 29 is now $7.6 bn, as against an outflow of $14.7 bn in FY23 prior to July29. Clearly, India seems to be enjoying the TINA (There Is No Alternative) factor, as globally all countries are facing the churn and India seems to the best placed jurisdiction in terms of growth and inflation outlook in FY23."

The US Fed is entirely focused on bringing down inflation to intended levels and has signalled further rate increases to induce a slowdown in US economic activity and demand in order to curb inflation and inflation expectations. It would appear that the US Fed finds US economy activity to be still quite strong and consumer demand and labour market conditions to be well above the levels required to bring down inflation to its intended 2 per cent level, a Kotak report says.

Experts say the market has adjusted its rate expectations post the hawkish comments of the US Fed chair; it now expects US Fed Fund rate to climb to 4 per cent by early 2023 and stay there in 1HCY23. The US Fed is clearly signalling that it may be willing to induce a deeper and longer slowdown in the US economy in order to bring down inflation under control while markets had assumed a shallow and short slowdown.