INR update: FOMC likely to sound more optimistic; Inflows dominate USDINR price action

The FOMC’s communication strategy has aimed to ensure that markets remain confident of the economic outlook when times are good. In the current situation FOMC will look to boost market sentiments further. Currently the market prices in the next move as a rate cut somewhere in mid 2020, which the FOMC will look to delay or change into a rate hike. Therefore the dot plots from the FED can be expected to be somewhat hawkish even though there is no immediate rate action likely.

The FOMC today plus the nearing trade tariff deadline of 15^th Dec can result in the dollar index heading towards 97.8 levels from the current 97.50. UK election results will be available on Friday morning only. Markets have priced in a Conservative majority in spite of the market’s poor track record in predicting election outcomes and its impact on asset prices.

USDINR has seen large inflow getting sold over the last 2 days. USDINR 1m NDF is trading marginally right (1p) since yesterday even though RBI fix is trading around -0.75p. This seems to suggest short unwinding in NDF and actual inflow in onshore market. Likely that some large inflow is continuing even today. Nationalized banks are buying since morning but that has not been able to arrest the price fall. I would expect the downtrend to continue today, CMP 70.77, Range 70.85-70.60. The next major support for USDINR is in the zone of 70.30-70.55