In the first two days of the week, we have seen huge IPO dollar inflows coming into the market which led the rupee to test a 6-week high of 73.8475 on Tuesday this week. In a timeframe of 1 month, the rupee registered a low of 75.6675 on 12-10-21 and a high of 73.8475 on 9-11-21. For the time being, the dollar inflows have receded and the intervention from RBI at close to 74.10 level led to a down move in the rupee to touch a low of 74.59 on Thursday. Though the pipeline IPO dollar inflows and divestment inflows at a later date could again push the rupee higher to re-test the 74.00 stiff resistance level, we expect to see a repeat of RBI intervention at close to the above level to prevent the rupee from rising beyond the 74.00 mark on a sustainable basis.
As a result of moderate weakness in the rupee exchange rate, the forward dollar premium for 3-month and 6-month tenor has drifted lower to 3.80% and 4.55% per annum respectively. Before the end of next week, we are looking for the forwards upto 6 months tenor to drop further by 20 to 25 bps as the receiving interest from exporters shall induce such a down move in forwards.
Till the end of December 2021, we expect the rupee to trade in the range between 74.00 to 75.20 with a weaker bias. Due to higher inflation in the US, we are expecting to see a stronger dollar against the majors and Asian currencies including the rupee. Instead of keeping the payables or receivables as unhedged, it would be prudent to hedge the exposures by choosing an appropriate spot level between the anticipated range suggested above. Barring any unforeseen events and adverse external developments, we expect the rupee to end the current financial year at close to the 76.00 level, registering a depreciation of less than 3.50% on an annualized basis over the translation rate of 73.50 as of 31-3-21.
The dollar was well supported as the annual inflation rate in the US quickened to a 3-decade high of 6.2% in October, bolstered by a 30% surge in energy prices. US dollar extended gains for the third trading session and touched a high of 95.2670 level today first time in 15 months. Due to the stronger dollar, emerging market currencies and MSCI’s EM Currencies Index registered their sharpest drop in 2 months.
US yields jumped overnight due to the biggest annual gain in US consumer prices in 31 years and a weak 30-year bond auction. The 2-year yield which typically moves in step with interest rate expectations had its biggest upmove since March 2020. The 2-year yield jumped to a high of 0.5340% after the announcement of higher October inflation. The 10-year US yield also jumped to the current level of 1.57% from a low of 1.4150% registered on 9-11-21.