At the interbank forex market, the rupee closed at 78.03 against the dollar index. The domestic currency logged an intraday high and low of 77.90 and 78.07 respectively. On the previous day, the Indian rupee had hit a fresh lifetime low of 77.28 before closing at 78.04.
In its Ecologue report, Yes Bank stated that the greenback is likely to continue its rise with a firm footing.
There is a strong case for the dollar to stay at its peak level. In Yes Bank's opinion, inflation is a bigger problem in the developed markets than in the developing markets, - mostly on the back of the nature of the fiscal stimulus that supported consumption demand.
"Thus, apart from the supply-constraint driven rise in US inflation, there are signs of demand-led inflationary pressures. This led the US Fed to deviate from its “transitory inflation" rhetoric after the Russia-Ukraine crisis and signaled an aggressive removal of monetary policy accommodation," analysts Indranil Pan, Radhika Piplani, and Deepthi Mathew, economists at Yes Bank who authored the research note said.
Further, Yes Bank's Ecologue said, markets are now pricing in an aggressive 300bps increase in the Fed Funds rate. Other G4 central bankers have also started to move towards the removal of monetary accommodation, with the ECB signaling an end to the monthly asset purchases on July 1 and likely lifting interest rates by 25bps at its July policy. ECB also left the door open for a larger increase in rates in September.
The report added, "Despite narrowing of the monetary policy gap, we do not anticipate a reversal of the USD strength. We expect global inflationary problems to sustain as supply-side distortions fail to resolve significantly."
Consequently, as per Yes Bank's report, central banks would continue to tighten monetary policy and risk “policy misstep" and a “hard landing". That said, we do not expect USD firmness to extend itself significantly from the current levels, given the build-up of USD long positions.
As per the Yes Bank report, even as the policy divergence is expected to narrow, the strength of the USD is unlikely to wither away. It added, "We expect growth divergence theme to take the centre stage going forward. This should provide an upper hand to the US economy vis-à-vis other major economies. We do expect risk-off trades ensuing out of a likely global slowdown and is probably already priced into the stronger dollar."
On Tuesday, at the forex market, the dollar index held its near 20-year peak while other currencies against the basket struggled as investors bet cautiously as they brace for aggressive interest rate hikes from the US Fed later this week.
Currently, the dollar index held a 105.05 position at around 8.14 am EDT, compared to the previous closing of 105.08. The greenback touched a 52-week high of 105.28 on Monday.
Yes Bank expects the US Dollar Index to trade with an appreciation bias but with resistance at around 105 levels, as seen last month.
Due to the strong dollar, the Indian rupee is expected to hold its depreciation stance with RBI also trimming interest rates and expectations of more rate hikes going forward to tame inflation.
In the Ecologue report, Yes Bank stated that with Headline CPI inflation likely to be above the 6% threshold over the next 3 quarters, we expect the RBI to continue to normalise monetary policy and bring the repo rate to a 5.8-6.0% level by December 2022.
"While this is likely to provide some support to the INR, we do not think this reverses the depreciation trend that the INR has been witnessing recently," the report added.
So far in the calendar year 2022, the Indian rupee has depreciated by 5% against the dollar, and so far in the financial year FY23, the domestic currency weakened by 3.2%. Yes Bank further stated that USDINR has depreciated by 2.0% over the last 3-months and 6.9% over the last year.
Yes Bank, in the report, expects INR depreciation on the back of weakening domestic macro fundamentals: a) widening of the trade gap and a likely CAD/GDP of 3% (higher than RBI’s comfort level of 2.5%), b) widening fiscal gap with limited scope for the fiscal to provide any additional support to growth, c) worsening growth-inflation dynamics, especially with elevated food inflation being a large negative for private consumption demand.
Talking about inflation, the report said, "given the large volatility in factors affecting inflation, we see inflation in a range of 6.2-6.4% but after having considered the impact of monetary tightening. On the growth front, we think the biggest challenge would be domestic demand that could continue to suffer from poor wage growth, muted levels of employment generation, continued reliance on contractual labour; all this overlayed by a rise in food inflation that restricts scope for spending on non-essentials. We see FY23 growth at 7.0% but with a downside risk."
"We see USD/INR at 79.00-79.50 by end-March 2022," Yes Bank's report said.
