INR update: Hawkish FED speak!

A hawkish Dudley mentioned that financial conditions have not tightened to any significance in spite of the rate hikes and lower bond yields indicate the same. Perhaps we could infer that the FED wants higher bond yields and therefore US10 Y yields could be near its medium term bottom. Financial conditions index are loose if equities are high, local currency is weaker and bond yields are low. Therefore if the case is that the FED is worried about the easy financial conditions then it will continue on its hawkish path in spite of small correction in equity markets and the consequent reaction could me moderate dollar strength as US yields rise, in the medium term.

The overnight dollar strength is reflected in KRW and CNH today while the gains in US equities are not. Yesterday also Rs. 1800 crs came into GSecs although USDINR edged higher. NDF is not showing any significant direction. Last week’s selloff will prevent players from taking aggressive long positions in USDINR. Farm loan waivers do not seem to be concerning markets as of now. CMP 64.51, Range 64.66-64.45.