INR update: Range shifts to 64.00 - 65.50

The FED downwardly revised its inflation forecasts but kept the interest rate forecasts the same, therefore reemphasizing that the FED is not so bothered about inflation as it is about normalization. Till the time data is such that it requires the FED to support the economy, the central bank will continue its interest rate hikes and balance sheet reduction. Markets on the other hand expected the FED to reduce the interest rate hike outlook given the start of balance sheet reduction and consequently the markets read the statement as hawkish. But the lack of follow through after the initial 30 minutes suggests that nothing materially has changed for G7 post the FOMC.

 

The FED is expected to reduce the balance sheet size by USD 1.5 trillion therefore giving inherent strength to USD against EMs with weaker fundamentals. In this regard the recent slowdown in Indian growth, widening of CAD, resultant equity outflows and fiscal concerns might render INR vulnerable. The fact that INR did not appreciate on the back of positives like resolution of Doklam issue, CNH appreciation and de-escalation of North Korea crisis, suggests that for the next 2-3 months, sub 64 levels might be difficult to achieve. On the other hand USDINR upside should be capped at 65.50 in this period.

 

USDINR 1m NDF is trading 2p right. Basis last 2 day’s other EM currency movement USDINR should be around 64.30 so the up move is specific to India. Equity outflows continue without aberrations. One can expect nationalized banks to step in to sell USDINR above 64.50 given their both side intervention behaviour in the recent past. CMP 64.49, Range 64.40-64.55.