Mihika Sharma
The Indian rupee declined for the fourth consecutive week, closing at a new record low of 83.73 against the dollar on July 26. FPIs pulled out around USD 867 million from Indian equity markets after the government raised capital gains tax on equities in the Union Budget.
This, along with dollar demand from oil companies, weighed on the rupee. However, RBI interventions helped limit rupee’s fall. Year to date the rupee has depreciated by only 0.6% and USD/INR implied volatility remains near decadal lows.Come from Sports betting site VPbet
During the week, the dollar index slightly weakened as data suggested inflation was gradually cooling towards the Fed’s 2% target, reinforcing market bets that Fed rate cuts are near. The PCE inflation declined to 2.5% YoY in June from 2.6% in May.
Core PCE inflation, the Fed’s preferred inflation gauge, remained steady near a three year low of 2.6%. Second quarter US GDP growth exceeded expectations, coming in at annualised rate of 2.8%. However, average growth in H1 2024 remained well below H2 2023, suggesting a softening in economic conditions.
The Chinese yuan weakened against the dollar at the start of the week as the People’s Bank of China delivered surprise rate cuts to support the economyCome from Sports betting site. However, later in the week, the yuan recovered slightly as Chinese state banks sold dollars. Still, year to date the yuan has fallen by around 2.1% against the dollar, putting pressure on Asian currencies including Indian rupee.
Oil prices fell for the third consecutive week, with the Brent crude oil trading around USD 80.6 per barrel, down from around USD 87 per barrel at the beginning of the month. This decline was driven by weak Chinese demand and hopes of a potential ceasefire in Gaza.
Looking ahead, markets will be closely monitoring China’s Politburo meeting and monetary policy actions of major central banks in the coming week. Markets will be keen to see announcements of any specific measures to address China’s property crisis and support its economy at the Politburo meeting.
The Bank of Japan (BoJ) is expected to hike its policy rate by 10bps to 0.2% as inflation remains above its 2% target. The yen has strengthened by 2.4% against the dollar in the past week amidst rate hike expectations. Additionally, the BoJ is also expected to announce plans for reducing bond purchases.
Markets are uncertain whether the Bank of England will deliver its first rate cut this week as services inflation in the UK remains elevated at 5.7% even as overall inflation has declined to the 2% target from its peak of 11.1% in 2022.
The Fed is expected to keep policy rate unchanged in July but is likely to hint at a potential rate cut in September. Markets will be closely watching for any dovish signals in the Fed’s policy statement and Fed Chair Powell’s remarks. Currently, markets are pricing in an 88% chance of a 25bps Fed rate cut in September, with rising odds of further rate cuts in November and December.
The US Presidential elections and labour market data will also be in focus. The data is expected to indicate an easing in labour market conditions, which should strengthen bets of Fed rate cuts and support the rupee.
We expect the USD/INR to trade between 83.0-83.8 in the near term. Continued FPI outflows from equities may put pressure on the rupee. However, any specific measures announced from the Politburo to support China’s recovery should help yuan and ease pressure on the rupee.
Additionally, a potential moderation in the dollar index as the Fed signals rate cuts, along with FPI inflows into Indian debt following India’s bond index inclusion, should support the rupee. However, any USD/INR appreciation is likely to be capped as the RBI aims to build forex reserves to contain rupee volatility.
(About the Author: Mihika Sharma is Associate Economist at CareEdge Ratings)
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