Pessimistic market sentiment, the rupee may depreciate this week amid strong dollar;

Written by Raj Deepak Singh

The rupee hit an all-time low last week amid a stronger dollar, continued FII outflows and risk aversion in world markets. Market sentiment has been hurt as investors fear that high inflation is threatening corporate profits and restraining consumer spending. In addition, disruptions in supply chains, lockdowns in China, and Russia’s war against Ukraine have darkened the outlook for the world economy.

Further, the rupee has fallen on disappointing macroeconomic data. CPI data showed that inflation rose to 7.79% in April and the RBI remained above the comfort zone for the 4th consecutive month, amid a weak global market sentiment and harsh remarks by Fed officials. Fed officials have indicated the need for a 50bps increase in the next few meetings. Further, CPI data showed that inflation has eased somewhat but is unlikely to cool down quickly and will derail the Fed’s plan to aggressively tighten monetary policy.

We expect the rupee to depreciate further this week amid pessimistic global market sentiment and a stronger dollar. Demand for the dollar may rise on concerns that the central bank’s move to tackle high inflation could hurt global economic growth. Market sentiment has been hurt by the disruption of supplies due to the Covid-19 lockdown and the war between Russia and Ukraine, which has raised fears of global economic growth. On top of this, the major central banks are ending the Easy Money era.

In addition, traders will take cues from key U.S. economic data and be cautious before Fed Chair Powell’s speech so that USDINR is building higher on the daily chart from April 2021 to get an indication of future financial position. The rupee has maintained a strong support level of 76.50, as long as it stays above this level it may slip further to 77.80 / 78.00. It is unlikely to survive beyond Rs 78.00 as it will act as a strong and physiological resistance.

(Raj Deepak Singh is an Analyst – FICO, Currency and Commodities at ICICIdirect. Opinions are the author’s own. Please consult your financial advisor before investing)

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