As a result of broad stability in the rupee exchange rate, the forward dollar premia upto 12-month maturities have drifted lower. The 3-month and 6-month forward dollar premium are currently quoted at 3.75% and 4.55% per annum respectively and a further drop in forwards by 20 to 25 bps in the coming weeks can be seen as we feel the market’s huge paying interest has slowed down. The forward curve beyond 6 months steepened with the forward market differential between the 6-month and 12-month maturity has turned into 0.07% per annum positive.
We expect the rupee to test the 74.60 level in the next 10 days timeline and strongly recommend the exporters to sell their medium-term export receivables targeting the above-referred level. The forward exchange rate for end-March 2022 maturity is 75.46 and the market generally expects the rupee exchange rate to end the current financial year at close to the abovesaid level.
In the event, the US yields climb higher supported by an increase in expectations of Fed rate hike in the middle of next year, the rupee is bound to weaken toward the 75.00 level initially and 75.50 thereafter before any stability can be seen. As a result of rising US yields, the benchmark 10-year sovereign bond yield has risen to currently trade at 6.36% and the market expects the yield to touch 6.50% before the end of December as a result of repatriation of bond outflows by foreign investors. Today the rupee is now trading in the vicinity of 74.40. The IPO dollar inflows have almost receded which led to a moderate weakening in the rupee exchange rate. After the US inflation touched a 31-year high of 6.2%, the touched a high of 95.27 last week, the highest level in 15 months. A sharp rise in the dollar index led to a fall in major currencies and also in Asian currencies except for Korean Won.
India’s retail inflation rate rose to 4.48% in October 2021 as compared with 4.35% in September and is well within the RBI’s 6% margin for the fourth month in a row. While the inflation data is favorable, industrial growth fell sharply to a 7-month low of 3.1% in September from over 12% in August. The waning base effect has exposed a weakness in the industrial recovery. Going ahead, the IIP growth may remain subdued in the coming months. Based on lower retail inflation, RBI can be expected to maintain the repo rate unhedged at 4% at least till the end of the first quarter of FY 2022-23.