USDINR and Global markets – morning update

14th July 2020

INR likely to open around 75.30

USD recouped some of its losses yesterday, as intra-day risk aversion in US markets brought back US equity from the highs for this year. EUR is at 1.1340, after being higher than 1.1370. News that California has re-imposed a ban on all indoor activities led to a reversal in sentiment. Indian equities saw small gains of 0.3% yesterday. Asian markets have opened flattish today.

Coronavirus cases across the world jumped by around 200k yesterday, and the increase in mortalities remains on the lower side, despite the surge. While the overall mortality of the disease is quite low, research suggesting that the virus can cause permanent damage to vital organs makes the disease dangerous and governments wary of large and unmanageable spread. California has done a U-turn on the lockdown relaxations triggering fears that more and more states would follow suit.

India reported 28k new cases, 9k new active cases, and 540 fatalities. The fatality rate has slightly ticked up with the daily death count now firmly above the 500 mark. The infection is nowhere close to slowing down at the country level, even as the hotspot cities like Mumbai, Delhi, and Chennai are showing trends of slowing down. With Pune, Bengaluru, and Hyderabad picking up the mantle, the infection has more legs to go before a peak can be thought about. The positive test ratio for Bangalore and Hyderabad is in the 10-15% range, despite increasing testing. Pune and Bengaluru are going into a week to 10-day full lockdown, and more such actions might emerge in other problem cities/states. The economic impact of this virus is likely to be permanent as most small businesses might not survive the extended demand crash.

India CPI for June came in at 6.09% – higher than market expectations, and higher than the RBI’s comfort zone below 6%. While the print might not deter RBI from cutting rates further, the persistence of CPI is sure to create some resistance to large cuts. The Rupee has almost given up all the gains made in the move towards 74.50. If the 75.20/40 zone is convincingly broken, one can expect a bit more momentum for USDINR to the upside. While the global backdrop is balanced for now, the risk of shutdowns and US-China spat makes the outlook for Rupee a bit murky. But, positive factors like central bank liquidity could keep the door open for some INR stability. The most likely scenario for the Rupee is that the previous range of 75.40 to 76.20 might again become the de-facto range.

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