Traders continue to bet on rate divergence; rupee remains sideways to bearish

Traders continue to bet on rate divergence; rupee remains sideways to bearish

By Dilip Parmar

May was an unpleasant month for Asian currencies as most of them were down against the US dollar amid tighter supply and haven bidding. However, June started a bit positively as the US govt. manages to suspend the debt limit before the estimated June 5 X date. The debt deal will help avert a fiscal crisis and fuelled the rally in financial assets. 

The Indian Rupee started June on a positive note but the historical trend doesn’t support the strength as 7 out of the last 10 years remained bearish with an average depreciation of 1.17%. The technical trend of the local unit remains sideways to bearish with downside support at 83 and resistance at 81. 

India’s forex reserves fell for the second consecutive week, dropping by $4.34bn to $589.14bn for the week ended May 26, the RBI said on Friday. The revaluation of dollar assets and ease in liquidity condition dragged the forex kitty lower in the last two weeks but still up more than $10 from $578.45bn at March end. The overseas investors bought $5 billion worth of equities in the month of May, the biggest inflows after August 2022.  

The dollar marked the biggest monthly gains in three amid worries over the US debt ceiling, hawkish fed member comments, upbeat economic data and haven buying. The Fed swaps boosted the tightening expected by the Fed’s July meeting to a quarter point, expecting a pause in June. The greenback ended higher against all of its G-10 currency peers in May.

Policy divergence is going to play out in June month as traders and investors are pricing in a pause from RBI and Fed while the ECB and BoE may continue raising interest rates.

(Dilip Parmar, Research Analyst, HDFC Securities. Views expressed are analyst’s own. Please consult your financial advisor before investing.)