By: Mr. Vaqarjaved Khan, Research Analyst, Angel Broking Ltd
The rupee has appreciated by 1.9 percent since the start of Sep’20 along with other emerging market currencies. In line with appreciation in risker assets, the dollar index has declined by 0.85 percent during the same time frame. Positive global cues such as hopes of fast-tracking of vaccine released along with the second stimulus package from the US Government led to an appreciation of the Indian rupee in the last couple of months.
India’sGDP to rebound by 8.8 percent in 2021
India’s daily number of coronavirus cases continues to decline post making a peak of 97000 cases in a single day on 15th September. Along with the falling number of daily cases recovery rate of patients has also increased and is now touching 88.8 percent. However, the number of cases still continues to remain elevated but expected demand recovery can be seen in H2FY21.
In IMF’s latest outlook it projected India’s GDP to contract by 10.3 percent in 2020 which was a downward revision from its previous forecast of 4.5 percent in June 2020. Thus reflecting a severe than the anticipated contraction in economic activities in the first quarter as the result of the nationwide lockdown to control the rapidly spreading pandemic. However, the Indian economy is expected to rebound by 8.8 percent in 2021 according to IMF.
Stimulus to remain the key for economic recovery
US FED’s balance sheet has ballooned to nearly $7 trillion in Sep’20 from $4 trillion since the start of the pandemic in Mar’20. In the latest US FED meeting minutes on 7th October, the Central bank vouched to keep interest rates at near-zero for the coming years. However, fiscal stimulus in the form of a second coronavirus relief package to play a US economic recovery.
Jerome Powell stated that the US has seen better than expected economic recovery since May’20 but lack of further fiscal stimulus could jeopardize the economic recovery going forward.
In line with global central banks, RBI has maintained an accommodative stance on its monetary policy along with record low repo rates of 4 percent. However, in RBI’s latest monetary policy meeting the central bank finally admitted that the Indian market is likely to contract by 9.5 percent in FY21.
US economic recovery has been better than expected from May onwards according to US FED Chief Jerome Powell but with the US still posting a high number of daily Covid-19 cases he urged the Senate to continue their efforts for the more fiscal stimulus package.
However, talks over the fiscal stimulus package have been dragged on for days, and weeks and outcomes on the same remain unlikely in the coming days.
Meanwhile, FII flows into the Indian equity market turned negative for the first time since the start of the pandemic. There was an outflow from the Indian equity market of Rs. 7783 cr in September. However, FII flows for the month of October has been positive with a net inflow of Rs. 14417 cr.
Treasury yields have been showing an upwards trajectory movement since the start of August with current yields at 0.856 percent against 0.515 percent in August.
Going forward rupee’s trajectory would be heavily dependent on the FII flows in the Indian market coupled with early vaccine hopes for the Covid-19 virus.
Hence, USDINR (CMP: 73.65) is likely to move in the range from 73 at the lower end of the spectrum and 75 at the higher end of the spectrum till the end of Nov’20
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