Dow rallied yesterday on the back of stronger reported earnings while the volumes on the exchange was one of the lowest in this calendar year. On the other hand the 10-2 spread continued to narrow in the US (43 bps), which could now propel dollar index lower. The lower volumes and narrower 10-2 spread makes me think that equity markets could have limited upside from here in the medium term, although a sharp fall is something one cannot bet on either.
USDINR 1m NDF is trading right by 5.5p as compared to 4p yesterday. We saw large outflows in bonds and equities yesterday while India 10Y yields continue to hover around 7.5%. Although the sentiment in USDINR looks like that the pair should go higher but I would expect 66.10 to hold for a month at least. Sharp INR depreciation would result in higher capital outflows and thereby could push yields higher as well. This could compound the problems for the government on the fiscal front. RBI is very well aware and would use its large reserves to ensure that runaway depreciation does not happen for INR. The move up in USDINR should therefore be controlled and gradual. Therefore I would expect INR to remain in the new range of 66.10-65.30 for some time (May end perhaps!). For the day CMP 65.68, Range 65.60-65.75.
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