Rupee targets speculative flows after key resistance defeat

May 28, 2024

Key points

• The Indian rupee opens little changed, with a focus on speculative flows.
• U.S. core PCE inflation data and Fed policy outlook remain crucial for global markets.

The Indian rupee is expected to open steady on Tuesday, influenced by speculative and other flows after failing to breach a key resistance level in recent sessions.

Non-deliverable forwards indicate that the rupee (USDINR) will open mostly flat from its previous close of 83.13. The currency approached the psychologically significant level of 83 on Friday and Monday but could not break past it.

Picture: Downside prevails for USDINR. Download the VT Markets app to see more.

Rupee struggles during election uncertainty

Taking out the 83 level has proven difficult, implying that speculators may be less inclined to add more rupee long positions. With the Indian national elections approaching, market behavior is expected to become more unpredictable.

The election results are due on June 4, with exit polls released on June 1. Early opinion polls predicted a comfortable victory for Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP), which was seen as a positive signal for the rupee.

However, reports of lower voter turnout and fatigue have raised doubts about the BJP’s margin of victory, leading foreign investors to withdraw $2.8 billion from Indian equities this month.

You might be interested: Election years could be profitable for political traders

Asian currencies mixed; Investors eye US inflation data

Broader Asian currencies showed mixed performance while the dollar index (DXY) edged slightly lower. Investors are closely watching the U.S. core personal consumption expenditures (PCE) price index report, the Federal Reserve’s preferred inflation measure, due on Friday.

Persistently high U.S. inflation, robust growth data, and recent comments from Fed policymakers have led investors to reduce their expectations of rate cuts this year.

Futures are now pricing in just one-and-a-half rate cuts for 2024. Goldman Sachs recently revised its forecast for the Fed’s first rate cut from July, to not this year, then more recently, to September.

Key indicators:

• One-month non-deliverable rupee (INRNDFOR=) forward: 83.20; onshore one-month forward premium: 7 paisa.
• Dollar index (DXY): Down at 104.42.
• Brent crude futures (BRN1!): Up 0.2% at $83.3 per barrel.
• Ten-year U.S. note yield: 4.46%.
• NSDL data: Foreign investors sold a net $112.7 million worth of Indian shares on May 24.
• NSDL data: Foreign investors bought a net $78.5 million worth of Indian bonds on May 24.

The rupee’s inability to break the 83 level suggests a cautious market stance. As election results loom, speculative flows will likely dominate the rupee’s movements in the short term.

Market participants are also keeping an eye on global indicators, especially U.S. inflation data and Fed policies, which will significantly impact the overall market sentiment.

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