INR stable as global markets calm after the storm. Macro data next month back to focus.

INR likely to open around 82.15/20

Dollar traded subdued even as US yields jumped higher yesterday. Dollar Index is at 102.15 now, with EUR at 1.0845, GBP at 1.2335, and JPY at 131.65. US 10y is at 3.58%. Equities ended lower, with DOW seeing a 0.2% cut. Indian indices traded with mild losses.

For now, the banking crisis seems to have been managed in the US, but the underlying stressors remain very much relevant. The big risk for markets is now whether the Fed would cut rates as expected or continue to talk hawkish on inflation. Next month’s jobs data and then the inflation print would be the key data points for markets. Now that the banking crisis is on the backburner, fears remain that sticky inflation might again force the central banks to keep rates elevated, resulting in lower bond prices and continuing losses to banks. The 10-2 yield curve remains inverted, signaling recession in the coming months. In our view, the banking system is not prepared for a deep recession, especially as bond losses remain high. 

INR is in a range for now, but the risk of a panic move and broad Dollar strength will be relevant in the coming months. Any short-term dip in USDINR remains a buying opportunity from a long-term perspective, as the coming months of 2023 and then 2024 might see the unraveling of excesses of the past 10-12 years. How long would the central banks be able to kick the can down the road with a money-printing strategy the question now? Hedging strategies should keep in mind the tail risk of sharp moves in markets and keep an allowance to gain if such moves do occur.