Rupee may appreciate this week on the back of dollar inflows

Last week, the Indian rupee weakened towards 73.50 level because of a rise in US Treasury yields on the back of optimism over larger economic package under President-elect Joe Biden lifted the greenback globally. In the coming days, we may see the rupee trade within a range of 72.90 and 73.60. The initial trend could be negative as the dollar has turned positive and is expected to remain so for some time after the US Federal Reserve Chair Jerome Powell said that it is not the time to talk about changing the Fed’s asset purchases. Also, the President-elect Biden has laid out his $1.9 trillion stimulus package proposal, but markets are uncertain over how easily Democrats will be able to get their proposals through the Senate.

In addition, there has been a lot of paying seen across the forward curve with 1Y points spiking to 350p, or 4.8 per cent. The forward curve is extremely elevated at this point which makes shorting the rupee against dollar expensive. (1Y Carry at 4.80 per cent looks extremely attractive to receive at this point).

There is a possibility that the rupee could appreciate on the back of possible inflows into the system. Abundant liquidity in the global financial system has led to persistent dollar inflows into Indian assets for the last few months. The trend is likely to continue for some more time, thereby working in favour of the Indian currency. Moreover, a couple of companies, namely Indian Railway Finance Corp (IRFC) and Indigo Paints, are looking to raise funds through initial public offers this week.

Lack of important economic datasets from India shall prompt traders to focus on international events such as the ECB policy meeting, President Biden’s speech and other important economic datasets from the US. This shall keep the dollar index volatile, thereby influencing the trend of Indian currency. This week, the rupee may take cues from movement in the dollar index. Movement in domestic share indices is likely to lend direction to the rupee later in the week. Any move towards 73 could invite RBI intervention.

(The author is Founder and CEO, IFA Global. Views are personal)