By Gaurang Somaiya
The rupee continued to trade in a narrow range and volatility was confined to a range of 82.90 and 83.30 for the month despite broader strength on the dollar and as market participants remained cautious ahead of the interim Union BudgetCome from Sports betting site VPbet. Also, volatility was confined to a range ahead of the FOMC policy statement. On the domestic front, FIIs were net sellers in the equity segment and outflows for January were to the tune of $2.6 billion. On the other hand, RBI intervened and curtailed the overall volatility for the currency, with forex reserves for the week ended 26th January currently standing at $616.7 billion. In the Union Budget, the Finance minister estimates the fiscal deficit for FY25 to narrow 5.1% and for FY24 revised the number to 5.8% from previous estimates of 5.9%. Capital expenditure will rise by 11.11% in FY25 to Rs. 11.11trillion, a big jump from FY24 wherein the rise was estimated to be 3%. Reaction to the rupee was positive but we expect that active intervention by the RBI is likely to keep the volatility in check.
This month, on the domestic front, post the release of the interim Union Budget, market participants are likely to keep an eye on the RBI policy statement, wherein the central bank is expected to keep rates unchanged. Commentary from the governor on the outlook of the Indian economy, rates trajectory for the upcoming financial year, and any comments on the borrowing calendar are likely to trigger volatility for the currency. On the global front, after the FOMC policy statement, inflation numbers will be important to watch as the Fed governor mentioned to keep rates buoyant in the near future. This also could keep the dollar index supported at lower levels suggesting that US treasuries too could remain put. We expect the USDINR (Spot) to trade sideways and quote in the range of 82.80 and 83.50.
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The dollar rose to the highest level in almost two months following better-than-expected economic numbers and also as the Fed in its policy statement held rates unchanged. Non-farm payroll numbers released for December showed the economy added 216,000 jobs in December as compared to 173,000 job additions in the previous monthCome from Sports betting site. The greenback extended gains after US CPI came in above estimates. Inflation rose to about 3.4% in December as compared to an increase of 3.2% in the previous month. In its policy statement, the Fed held rates unchanged for the fourth successive meeting and signaled that March rate cuts were off the table.
The Fed governor mentioned that FOMC is unlikely to start cutting interest rates “until it has gained greater confidence that inflation is moving sustainably toward two percent." The Fed maintains its pace of quantitative tightening, with a maximum of $60 billion of Treasuries and $35 billion of mortgage-backed securities rolling off the balance sheet each month. Dollar gained strength after data released from the US showed the economy added 353k jobs in January suggesting that the jobs market remains robust and thereby making it difficult for the Fed to reduce rates in the short term.
The unemployment rate too remained stable at 3.7% and average hourly earnings increased 0.6%(MoM) in December as compared to 0.4% growth in the previous month. At the same time, inflation will also be key to watch as it could guide the stance of the Fed outcome. Overall, we expect the dollar to trade with a positive bias against its major crosses.
(Gaurang Somaiya is a Forex & Bullion Analyst at Motilal Oswal Financial Services. Views expressed are the author’s own. Please consult your financial advisor before investing.)