had a lukewarm start in the holiday shortened week, but thereafter weakened to 73.94 level. The reason could be a stronger DXY as global risk sentiments took a hit after some countries re-imposed fresh lockdown restrictions to rein the spread of a new coronavirus strain. Even the domestic equities were not spared as traders opted for profit booking. However, the trend changed soon, bringing the rupee again into the positive territory. It appreciated towards 73.53 levels owing to dollar selling by banks for forward delivery.
Also, persistent flows into the system worked in favour of rupee as well. FII inflows for FY 2020-21 stood at Rs 2,03,035 crore. Abundant liquidity in the global financial system due to massive easing by major central banks as well as expectations of fiscal stimulus in the US resulted in hefty foreign fund inflows into emerging market assets, including in India.
This week, the rupee may take opening cues from movement in the dollar index as well as developments over fiscal stimulus in the US. Movement in domestic share indices is likely to lend direction to the rupee. Also, FIIs typically close their books before the end of the calendar year and their participation is likely to be low amid Christmas holidays in offshore market. USDINR is expected to trade within the range of 73.30 to 74.10 this week. Any move towards 73.30 could invite RBI's intervention to limit further appreciation by buying dollars in the spot, forwards or futures market.
Abundant liquidity in the global financial system led to persistent dollar inflows into Indian assets during the last few months. Despite foreign fund inflows worth Rs 62,648 crore into Indian assets this month so far, the rupee managed to strengthen by only a meagre percentage. In the recent RBI bulletin, the central bank has confirmed that they would do whatever necessary to ensure financial stability during the pandemic by curbing high volatility in the forex market to protect trade activities and overseas investments from being hampered.
On the global front, jobless benefits of millions of Americans is expected to expire today as US President Donald Trump refused to sign into law the spending package, protesting that it did not do enough to help everyday people.
The omnibus spending bill of $1.4 trillion to keep the government running is linked to the $900 billion stimulus bill. President Trump believes the $600 direct cash transfers to individuals need to be increased to $2,000 and believes some allocations in the $1.4 tn spending bill to be "wasteful and unnecessary". There is a high possibility that the US government could shut down on Monday if coronavirus aid and funding bill issues are not resolved.
Keeping all the above factors in mind, the volatility in rupee may be subdued this coming week as market participants may avoid placing large bets in the absence of domestic cues. Given that the RBI has intervened on exchange, we may see RBI fix trading at a discount in OTC on the day of expiry i.e. 29th December. 73.40 is an extremely crucial support for USDINR.
(Abhishek Goenka is Founder and CEO, IFA Global. Views are his own)
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